The implementation of Making Tax Digital (MTD) in the United Kingdom is set to bring significant changes to the tax system, particularly for sole traders and landlords. In this blog post, we will summarise the key points you need to know about the Making Tax Digital rules based on the latest information available.
MTD for Income Tax Self-Assessment (ITSA) was initially scheduled to start in April 2023 but has been delayed until April 2024. This delay follows a series of previous delays and deferrals in the MTD rollout. Small businesses were originally meant to be the first to adopt MTD in April 2018, but the focus shifted to MTD for VAT. The implementation of MTD for ITSA was postponed to learn from the lessons of the VAT rollout.
Sole Traders and Landlords:
From April 2024, MTD for ITSA will come into effect for sole traders and unincorporated landlords with business or property income of £10,000 or more in the 2024/25 tax year. The £10,000 threshold applies to gross income or turnover, not profit. If an individual or entity has multiple trades or property businesses, the figures are combined to determine if the threshold is exceeded.
For general partnerships with income above £10,000, MTD for ITSA will begin in the tax year starting from April 6, 2025. This is a delay from the previously expected start date of April 2023. More complex partnerships, such as limited liability partnerships and mixed or corporate partnerships, will have their implementation dates announced later.
The same exemption criteria that apply to MTD for VAT will also apply to MTD for ITSA. This means that non-resident companies, trustees, executors and administrators, businesses under insolvency procedures, and foreign businesses of non-UK domiciled individuals are exempt. Additionally, businesses run by members of religious societies or orders with incompatible beliefs and those unable to use digital tools due to age, disability, or remoteness of location may be exempt. Exemptions can be claimed by applying to HMRC in writing or over the phone.
Software and Filing Deadlines:
From April 6, 2024, businesses affected by MTD for ITSA must use MTD-compliant digital software to submit quarterly summaries of their income and expenses. The software will generate updates and statements, and HMRC aims to offer free software products for businesses with straightforward tax affairs. The quarterly filing deadlines for most unincorporated businesses under MTD for ITSA will be on or before August 5, November 5, February 5, and May 5. Businesses will receive a tax estimate from HMRC based on the quarterly summaries, providing a more real-time view of their tax liability. The January 31 income tax payment deadline and the end-of-period statement deadline following the relevant tax year will remain in place.
A new late-submission penalties regime will be in effect for MTD for ITSA from April 2024. Sole traders and landlords who miss submission deadlines will accumulate points, and once a certain threshold is reached, a £200 fixed penalty will apply for the late return and subsequent late returns.
To prepare for Making Tax Digital, sole traders and landlords should implement MTD-compliant software within their business. Various options are available, including software packages like Xero, QuickBooks, and Sage, API-enabled spreadsheets, and bridging software. Taking a digital approach to managing finances provides real-time insights, promotes collaboration with accountants, and enables better-informed decision-making.
It is important for sole traders, landlords, and businesses to familiarise themselves with the specific requirements and deadlines applicable to their situation. Utilising MTD-compliant software and maintaining accurate digital records will not only ensure compliance with the tax regulations but also provide businesses with real-time insights into their financial position.