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

What will MTD for income tax require?

If you own a UK business or property, and you have gross self-employment and property income in excess of £10,000, you‘ll 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. 

Rather than filing one UK self-assessment tax return, you’ll submit six submissions to HMRC per year. So assuming that you choose an accounting period that is aligned with the UK tax year, from April 2024, the submissions required for the tax year 6 April 2024 to 5 April 2025 will include: 

The quarterly updates will only include a summary of your business income and expenses, you are not required to provide details of any other personal income as part of the updates. If you have employment income, HMRC are planning to use information they hold to feed this directly into your final submission, so you won’t have any additional filing requirements for this.

However, you may be required to submit additional updates if you have multiple trades, or simply a sole trade and a rental property, which have different accounting periods. HMRC also plan to automatically include other income sources as part of the final submission process in the future, such as interest income from UK bank accounts.

There are no changes to the tax payment dates, they will remain 31 January and 31 July as applicable.

The cost

Unsurprisingly, this will come at a cost. HMRC estimates that the transitional costs alone will cost businesses in the UK £1.383 billion, with additional annual tax compliance costs of £152 million a year. Most of the additional costs will be borne from additional professional fees, as businesses look for guidance and advice on how to prepare for this significant change and complete the submissions.

The costs of preparing and complying with MTD are not the only potential costs to be aware of. HMRC is introducing a new penalty regime alongside MTD, with a points-based system that penalises those with persistent compliance issues. You should therefore ensure you’re prepared ahead of time, to mitigate the risk of starting the new compliance system with a black mark on your record. 

How to plan ahead

If you’re a UK 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:

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.

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. 

With the ambiguity surrounding much of MTD and delays to its integration, it’s easy to become complacent with the preparations that need to be made. While this is some time away, preparing now will ensure you face a smooth transition and minimise costs down the line. For more information on the above or advice tailored to your situation, please fill out the form below and one of our experts will be in touch to discuss your requirements and how we can help.