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Planning ahead - Making Tax Digital (MTD) for income tax

Recent HRMC announcements regarding MTD for income tax may give the impression there’s lots of time to spare before you need to consider the implications, but if you’re a business owner or landlord you can use this time wisely now to make life easier in the long run.

MTD for income tax was due to come into effect from April 2021, subject to HMRC’s review of the implementation of MTD for VAT, which launched in April 2019. In July 2020, HMRC released a 10 year plan for MTD including the announcement that MTD will be mandated for income tax from April 2023. While this is some time away, preparing now will ensure you face a smooth transition and minimise costs down the line.

What will MTD for income tax require?

If you’re a business owner or landlord with gross income in excess of £10,000, you will be required to keep income and expense records digitally and to submit records directly to HMRC using MTD compatible software. Rather than filing one self-assessment tax return, you’ll submit six submissions to HMRC per year which will potentially require more time and resource than before. 

If you have other sources of income, such as investment income, foreign source income or capital gains these will all be captured in the final declaration. Click here for more information on the submissions required if MTD for income tax is mandated from April 2023. 

About the author

Paul Baker

+44 (0)20 7556 1391
bakerp@Buzzacott.co.uk
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MTD for income tax was due to come into effect from April 2021, subject to HMRC’s review of the implementation of MTD for VAT, which launched in April 2019. In July 2020, HMRC released a 10 year plan for MTD including the announcement that MTD will be mandated for income tax from April 2023. While this is some time away, preparing now will ensure you face a smooth transition and minimise costs down the line.

What will MTD for income tax require?

If you’re a business owner or landlord with gross income in excess of £10,000, you will be required to keep income and expense records digitally and to submit records directly to HMRC using MTD compatible software. Rather than filing one self-assessment tax return, you’ll submit six submissions to HMRC per year which will potentially require more time and resource than before. 

If you have other sources of income, such as investment income, foreign source income or capital gains these will all be captured in the final declaration. Click here for more information on the submissions required if MTD for income tax is mandated from April 2023. 

How to plan ahead

How to plan ahead

If you’re a sole trader already complying with MTD for VAT, you shouldn’t see much change in your record keeping when it comes to MTD for income tax. However, other sole traders and landlords should start planning for the transition now to ensure MTD compliance and to avoid any penalties. The best way to get started is to:

1. Ensure that you are keeping your income and expense records in a digital format

When you get paid in cash you should use software to record the transaction digitally in a spreadsheet or bookkeeping software. Also, avoid piling up stacks of receipts and instead start getting into the habit of scanning in and saving those travel or office expenses, ready for each quarterly submission. We recommend that you do this before the end of the current tax year so you are familiar with digital record keeping well ahead of the implementation of MTD for income tax.

2. Align your accounting periods if you have multiple trades

If you have multiple trades, or a trade and a rental property with different accounting periods you should look to align these to reduce your future reporting requirements under MTD for income tax. For example, if you have a sole trade with the year end 31 March and a rental property which you report on a UK tax year basis (to 6 April), you should look to change the accounting periods to the same end date to avoid the additional four quarterly submissions if your tax years are not aligned. 

3. Join the HMRC MTD for income tax pilot

HMRC is currently running a very limited MTD for income tax pilot and learning from the implementation of MTD for VAT to help prepare for a full roll out. If you’re a UK resident sole trader with one business, or a landlord with UK property income, you are eligible for the pilot. If you have income from any other sources, you’re unable to join currently. By joining the pilot, you’ll benefit from first-hand experience with the new “real time” tax system and ensure you are ready ahead of it MTD for income tax being mandated for all. If you are interested in joining the pilot please get in touch below and we will add you to the waiting list. We are hoping to join the pilot later this year and there will be no additional costs for this service for existing clients.

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For more information on the above or advice tailored to your situation, please contact Paul Baker or fill out the form below and one of our experts will be in touch.

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