Why should you prepare for MTD for Income Tax?

by | Jun 14, 2021 | Blog, Cloud accounting, Running a business, Self-assessment

Making Tax Digital (MTD) is a key part of the Government’s plans to make it easier for individuals and businesses to file accurate returns and keep on top of their tax affairs. MTD is making fundamental changes to the way the tax system works – transforming tax administration so that it is more effective, more efficient, and easier for taxpayers to get their tax right. 

Since April 2021, all VAT-registered businesses with a taxable turnover above £85,000 have been required to submit their VAT returns electronically via MTD-compatible software. Moving forward, all VAT-registered businesses will be required to follow MTD rules for their first return starting on or after April 2022.  MTD will also apply to Sole Traders and Landlords with an annual income exceeding £10,000 starting from 6 April 2023.

How does MTD for Income Tax affect Sole Traders and Landlords? 

Sole Traders and Landlords with income above £10,000 will be required to use compatible software to keep digital records and send HMRC updates for their Income Tax. This means the end of the free HMRC tax return submission tool and instead a requirement to choose a suitable compatible software.

There will also no longer be a need to submit a Self-Assessment tax return. In its place, you’ll be required to send four quarterly updates, an end-of-period statement, and a final declaration to HMRC. This all sounds complicated, but it is not. In fact, you will end up spending less time on admin under this legislation than you did previously.

What are quarterly updates?

At least every three months, you’ll need to send HMRC a statement of your business income and expenses. The same is true for any property income that you earn. This allows HMRC to present you with a more up-to-date forecast on how much tax you’ll owe.

The MTD compatible software should make this process easy for you as you can log income and expenditure information in real time.

What about end-of-period statements and the final declaration?  

End-of-period statements will involve a similar process to the current one for Self-Assessment tax returns.

As for your final declaration, this is where you confirm that the figures submitted to HMRC are final and correct. This submission will then be used as the basis to calculate any tax you need to pay.

Why should I prepare for MTD for Income Tax now?

While Sole Traders and Landlords have until 2023 before MTD for Income Tax comes into effect, if you leave it too late to sign up for approved software, 2023 could be a bit of a nightmare year.

Not only would you need to submit your 2021/22 tax return by 31 January 2023 as normal, but you would also then have to quickly get up to speed with MTD for Income Tax before your first MTD submission. This first submission would most likely be for the period 6 April 2023 to 5 June 2023 and be due no later than 5 July 2023.

That’s why we recommend familiarising yourself with digital tax return software as soon as possible. By beginning to log your 2021/22 income and expenditure as and when they occur, you can effectively be ready to submit the corresponding tax return as soon as you’re able to. That means you won’t have to worry about the 31 January 2023 filing deadline, freeing you up to focus on your new MTD responsibilities.

You can start by signing up your business and choosing an MTD-compatible software so you can get to grips with keeping digital records. So, what are you waiting for? 2021 is the perfect year to get organised.

What can we do for you?

If there’s anything you’d like to know about Dunkley’s, we’d love to hear from you.