What the new ‘Making Tax Digital for Income Tax’ means for you and your business
HMRC recently announced that ‘making tax digital for income tax’ (also known as MTD for IT) will come into effect from April 2023. Essentially, this means the ‘once a year tax return’ will become a thing of the past. Income tax return information will now need to be filed electronically on a quarterly basis. This is a huge milestone and transition into digital finance, and it is imperative that small businesses should consider now how this impacts them.
In this week’s blog we’ll cover:
- What MTD for IT means
- Who MTD for IT affects and the proposed timeline of change
- Actions to take to start preparing for the MTD process
What ‘MTD for IT’ means and who is affects
‘Making Tax Digital for Income Tax’ simply means HMRC are introducing a new quarterly system which requires unincorporated businesses to keep their accounting records electronically. It is applicable to self-assessment, sole traders and landlords with annual turnover/takings exceeding £10,000. A final end-of-period submission will be required, after the end of the tax year. This is a huge milestone as this is the first time that this has happened, and it will affect lots of businesses. It is expected that the first submission will be required by July 2023 (tbc).
Alongside MTD for IT implementation, HMRC is proposing a change to how profits are assessed each year. This change involves the allocation of profits to a tax year (i.e. 6 April to 5 April) rather than based on your accounting year-end.
This is a technical change and you should speak to your accountant/advisor about this ASAP.
If you currently prepare accounts to either 31 March or 5 April, this won’t affect you. But if you prepare accounts to any other date, your accountant/advisor needs to look at your circumstances as you may be subject to a higher tax bill in the year of transition, due to a longer period of profits being assessed.
Example:
– Accounting profits to 30 June 2020 are taxed in the tax year 6 April 2020 to 5 April 2021
– For year ending 30 June 2023 (tax year 2023/24), the apportionment would allocate 3/12 of the year to 30 June 2023 and 9/12 of the year to 30 June 2024
– This will mean that two years’ accounting profits will need to be apportioned for tax purposes.
– Estimates may be required for the tax return 2023/24, as figures for the later of the two years may not be available when the tax return is submitted
Actions to take now
Our recommendation to tackle this new style of submission is to start the process now, don’t wait until April 2023. Small businesses need to begin gathering material now on income, and getting everything in order to facilitate the quarterly reporting further down the line.
More importantly, small businesses should move to cloud accounting apps such as Xero to ensure they have the tools they need to have real-time data and numbers ready for the new quarterly submissions.
Using cloud accounting tools looks easy based on the big TV adverts, but it’s not for the faint hearted. That’s why we offer our clients a fully functioning digital finance department to take care of everything from payroll to VAT, bookkeeping to reporting and everything else in between.
In conclusion, this is coming – so do not leave it to the last minute and seek support if needed. A digital finance team like Cloud 360 Accounting can help support and navigate businesses or individuals with this new process. Contact us today to see how we can help.