Making Tax Digital for Income Tax Self Assessment takes effect on 6 April 2023.
It will affect millions of clients who are self employed and will change how you will handle their taxes. It also affects landlords as well as the individuals within certain kinds of partnerships.
Are your clients any of the following, or a combination of them?
• A sole trader (and not a limited company).
• A landlord.
• A member of a partnership that doesn’t include a limited company as one of the partners and isn’t incorporated (that is, it is not a Limited Liability Partnership).
If so, then as of 6 April 2023, they will be legally required to comply with MTD for Income Tax if their turnover is above £10,000.
Here, we summarise six of the requirements surrounding MTD for Income Tax:
People won’t be switched to MTD for Income Tax automatically. You might need to sign up your clients ahead of the first full accounting period that begins on or after 6 April 2023. If your clients follow the tax year for their accounting period, as many small businesses do, then they’ll need to sign up in advance of 6 April. If you’d like to get ahead of the game, there’s an MTD for Income Tax pilot programme in place that you can sign up today.
2. Maintain Digital Records
You’ve got to keep digital records of all business income and expenses in line with existing tax record keeping requirements. As is currently the case for Self Assessment, you might need to keep client records relating to savings, investments and pensions too, as well as details of certain kinds of grants. You will need to keep all these records digitally for at least five years after the 31 January final declaration date for each tax year (see below).
3. Quarterly updates
At a minimum, you must update HMRC every three months with a summary of the client’s business income and expenses. Landlords will need to provide you with updates on rental income but don’t need to split it out by individual properties. There is currently no legal requirement for these updates to be accurate, but it’s a good idea because it will help you know your tax position.
4. End of period statements (EOPS)
At the end of the accounting period of any business, you need to finalise the taxable profit or loss via an EOPS. For clients who operate several businesses, then each requires its own EOPS following the end of its accounting period. Landlords also need to make an EOPS for all their property rental income. Within the EOPS, you can help your clients adjust for allowances and reliefs.
5. Final declaration
By no later than 31 January following the end of the tax year, you need to make a single final declaration. That means bringing together all the data including business and non-business income needed to finalise a tax position and reach your final tax liability.
6. Pay tax
Along with making the final declaration you need to pay the outstanding tax liability by 31 January each year. As with the existing Self Assessment scheme, you may also need to provide a payment on account by the following 31 July.
This might sound like a long list of admin tasks, but don’t forget that software is key to making tax digital. Good accounting software will automate a great deal of it, such as creating the quarterly updates.
And if the quarterly updates are as correct as they can be, then you can head towards creating any EOPS and final declaration with confidence.
Get a full breakdown with all the insights you need to boss Making Tax Digital and register for our regular MTD webinar for Income Tax.