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Making Tax Digital (MTD) For Income Tax

Tax Inheritance

It had to come! It was announced in 2016 and HMRC is not backing off. Indeed the Covid-19 pandemic has underlined the fact that HMRC needs to be in real time. To be issuing self-employment support grants in 2020 based on income for 2016/17, 2017/18 and 2018/19 is hardly on in this day and age.

So who does it affect? What will be required? Are there any exclusions? What about unrepresented taxpayers? What sort of records will be needed? How frequently will transactions need to be reported? Is self-assessment finished? These and many other questions arise and not all the answers are available yet.

Who does it affect?

Basically all unincorporated businesses and landlords with gross annual income in excess of £10,000 will be mandated into the new rules with effect from 6 April 2023.

Are there any exclusions?

Just a few. Charities and Community Amateur Sports Clubs are completely exempt although trading subsidiaries are not. Insolvent businesses will have some form of exception. There will be provision for businesses “unable to engage digitally” which covers the existing exemption from MTD for VAT returns. Trusts with rental income or trading activities are caught.

What will be required?

Affected businesses and landlords will be required to keep digital records. This will involve either using MTD-approved accounting software or spreadsheets accompanied by software that together meet the requirements of MTD. The exact content of the digital records is yet to be announced but it is likely to include enough information to identify the nature of any expenditure, and possibly the supplier, together with details of income. It is also likely that transactions will need to be analysed in the same format as currently required in self-assessment tax returns.

The above analysis will be a requirement even if firms or landlords currently submit “three line” details on current tax returns.

What will happen to these records?

They will need to be reported to HMRC in approved digital format at least quarterly within one month of the quarter end. There is no requirement for quarterly updates to include accounting adjustments for such items as accruals, prepayments and stock. But these are permitted if the business chooses. They are not returns for tax purposes and so are not subject to penalties for inaccuracy.

And annual finalisation?

Businesses (or their agents) will have to finalise their profits for the accounting year/period by the earlier of:

  • 10 months after the end of the accounting period; or
  • 31 January following the year of charge.

Meanwhile HMRC intends to provide an estimate of tax payable based on quarterly submissions. This in itself will present challenges if traders/landlords are not accurate with record-keeping or if businesses are seasonal. It looks as though the government is paving the way towards quarterly income tax payments based on real-time income. Watch this space!

And what about self-assessment?

It is likely that these will be with us for a few more years. The government has been talking about pre-populated returns in quite a different format, with HMRC deriving much of its information reported directly, in one form or another. The likelihood is that an abbreviated return will be needed on self-assessment lines but the jury is still out on this one. Meanwhile pilot schemes are being prepared for 2021 and 2022…

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