In the first of a two-part series we examine the current position regarding Making Tax Digital (MTD) and how you can best prepare yourself and your business ready for quarterly digital submissions.
From 6 April 2024 millions of self-employed businesses and landlords will need to adhere to HMRC’s new MTD for Income Tax rules. So, the question is, how can you best prepare for the changes?
Making Tax Digital is part of the government’s plans to make it ‘easier’ for individuals and businesses to get their tax right and keep more on top of their affairs. HMRC’s ambition is to become one of the most digitally advanced tax administrations in the world. They are hoping that MTD will transform tax administration so that it is more effective, more efficient and easier for taxpayers to get their tax right.
April 2024 might sound a long way off, but we’ve been recommending that our clients act as soon as possible to get prepared for the changes.
Will Making Tax Digital (MTD) affect me in April 2024?
MTD will affect sole traders and landlords with annual income of above £10,000. Note that this is £10,000 turnover, not profit.
If you’re a sole trader and you also receive property income, your combined turnover from the two will determine if you need to follow the MTD rules from April 2024. General trading partnerships will not need to meet the requirements until 6 April 2025.
For example, if you receive self employed income of £4,000 and income from property of £7,000, the combined income is £11,000 therefore you will need to follow MTD rules.
HMRC have also recently clarified, if you receive income from a jointly owned property, your share of the property income will be classed as your qualifying income for MTD. HMRC uses this example – two individuals own a property that generates £30,000, they both receive an equal share of the profits. If neither has self employment income, their qualifying income is £15,000 each and they will be required to file under the new rules.
Another example, two individuals own a property with rental income of £20,000. Profits are split 25%/75% and neither receives any income from self employment. The profit split means that one of the individuals receives £15,000 of qualifying income, the other receives £5,000. The individual with a £15,000 share of the rental income will need to file under MTD, however the other, with the share of £5,000, will not meet the requirement to follow MTD rules.
My income is above £10,000… What does this mean for me? What will I need to do?
To put it simply, the new regime will require that if you meet the criteria then by law you will need to start keeping your accounting records electronically, by either using MTD compatible software or a spreadsheet. As a firm we are encouraging our clients to go onto a software rather than using a spreadsheet. We will explain our reasoning in the second blog of this two part series.
It will then be a requirement for each of your businesses to submit quarterly summaries of income and expenditure. HMRC will issue an estimated tax calculation after each submission, this should help to budget for your final liability. At the end of the year, a final summary will be submitted to finalise the tax affairs.
The final submission will include any non-business information, so employment income, bank interest, dividends, pension contributions, student loan repayments etc. This will be the new Tax Return.
For more information on how the new rules and quarterly submissions will apply, please follow the link below.
If you have any further questions on MTD, Xero or how we can help your business, please contact your account manager, or if you are a potential new client please call us today on 01634 731390.
The content in this blog is correct as at 14 October 2022 See terms and conditions.