A new way of submitting Income Tax returns is on it’s way
MTD (Making Tax Digital) is being rolled out by the government in a new flagship programme that means it will be easier for businesses and sole traders to do their tax accounting.
This will be rolled out in the coming years before becoming law on the 6th of April 2024.
It is common to submit your tax return online using the HMRC service, but this will be going one step further. You will need to have software installed to do your accounting; such as Quickbooks to help with getting it submitted.
Using the accounting software will also lead to less time doing admin and accounts, leaving you free to get on with client work or something you love! It’ll also be easier to see what tax you owe throughout the year, making sure you can track the business’ cash flow better.
MTD for Income Tax will currently only affect those who will earn over £10,000 a year over property or businesses. Sole traders who earn less than this amount will still have to use the Self Assessment system.
What is a sole trader?
A sole trader works for themselves in their own business. You will be entitled to keep the profits you make after tax.
When you are a sole trader, you will still have to pay National Insurance contributions and taxes. These will be calculated after you’ve made more than the £1,000 trading allowance.
To make sure you pay the right taxes, you will need to be registered with HMRC so you can use the Self Assessment tax system. When you file the Self Assessment tax return, you’ll be telling HMRC how much you’ve earned and how much you are claiming as allowable expenses.
The Making Tax Digital for Income Tax will mean you no longer have to use the current Self Assessment system if you fall within the scope.
What are the rules?
We are currently waiting for the pending legislation to be published by the government, but this article covers what we know so far, as well as the GOV.UK website.
We know that for those sole traders who file with MTD for Income Tax, you will not need to send a Self Assessment tax return. You will need to send quarterly updates and an end of period statement.
At the end of January, you will be required to submit a final declaration for all your income.
When will this come into effect?
The government have planned for this to be live on the 6th April 2024.
If you use the tax year for your accounting, then you will use MTD for Income Tax once the tax year starts.
If your accounting period ends after 6th April 2024, your digital start date will also be later.
You will probably have an overlap between the MTD for Income Tax system and the Self Assessment system, which you will need to account for.
You will need to submit a Self Assessment tax return for the 2023/24 tax year by January 2025 or by 30 December 2024, if you’re asking HMRC to collect taxes from wages via PAYE.
Will a sole trader still be able to file paper self-assessments?
Most businesses will have to follow the MTD for Income Tax rules but there will be exceptions.
These will include those businesses where it is impractical or impossible for them to use the technology MTD requires.
This could be people with no internet access due to them being in a remote location, they have a disability that makes using technology impossible or they have a religious reason.
These exceptions will only apply to a few sole traders and they will be checked.
If you wish to be exempt for legitimate reasons, you will need to apply directly to HMRC to explain why.
Does a sole trader have to do MTD for Income Tax?
Due to the nature of the programme, you automatically opt-in for MTD if you fall within the threshold of £10,000 a year in earnings.
You cannot choose not to take part.
What software will I need to have?
HMRC recognise that there are lots of different accounting software out there now and have made MTD for Income Tax available to most of the larger cloud-based ones, such as Quickbooks, Xero and Sage.
If you are using desktop software, it will need to be updated in time or look into how it can be integrated with bridging software so the gaps are covered.
Some older software will not be updated, so you may need to look into a different option.
Will the deadlines change for MTD for Income Tax?
No, you will still need to file your final declaration by 31 January and pay the income tax by 31 January of the following year.
With quarterly updates and an EOPS being updated throughout the year, it’ll be easier for you to keep track of and file that final declaration.
I have MTD for Vat, do I need to register for MTD for Income Tax as well?
Yes, they are separate schemes so you will need to make sure you have signed up for both.
To avoid more admin, you can adjust your accounting period on your MTD for VAT to line up with the requirements for MTD for Income Tax, meaning you can do everything within the same period.
You will need to do this ahead of time and via a Self Assessment tax return.
Speak to us if you need any help or guidance with this.
Is my accountant able to sign me up for MTD for Income Tax?
Absolutely! Please speak to them ahead of time, if you don’t yet have an accountant, please contact us to see how we can help.
Accountants will also be able to submit the quarterly reports, the EOPS and the final declaration for you. They should check with you before submitting to ensure all the information is correct.
Can a sole trader use spreadsheets to help with MTD for Income Tax?
You can get bridging software to use alongside a spreadsheet for the MTD for VAT returns but we are unsure if this will work the same for MTD for Income Tax as you have to file reports quarterly.
There probably will be examples of compatible spreadsheets but it is unknown as yet which ones they will be.
Spreadsheets are useful for businesses but they have limitations and can cause more problems.
HMRC will also not allow you to copy and paste information from your spreadsheet into a system, everything has to be digitally linked so the information is automatically transferred.
HMRC can fine you if they believe you have copied and pasted information from one place into another.
The same can be said for paper or handwritten invoices. It is fine to create these documents, but it would be better to do them in an accounting solution so you have everything ready to go and everything is in one place.
Can I deregister for MTD for Income Tax?
At the minute, it is not yet known if a sole trader can remove themselves from the system if they fall below the £10,000 threshold.
As a sole trader, you should start planning now for MTD for Tax Return, find yourself some accounting software or speak to an accountant on how to get set up.
Work out the digital start date for your business, adjust the accounting periods if you have more than one business and make plans to get registered.
If you need any more advice or guidance, you can speak to us at D&K accounting on 01302 613 515 or email email@example.com