On 23rd September 2021, the UK Government announced that all individual income taxpayers must submit a digital tax return from 2024. It’s one of the most significant changes to taxation in recent years.
MTD, or Making Tax Digital, means a new digital tax return system that automatically generates a personalised online tax return.
However, there’s more to this MTD system. We will explain what the new legislation will mean for you as an individual taxpayer and how your tax affairs will be affected between now and April 2024.
What is MTD for Income Tax?
Making Tax Digital for income tax is the first step toward a digital, 21st-century tax system. It helps businesses in their efforts to make income tax digital and provides an online service bringing it into the digital world.
This strategy aims to strengthen the tax system, increase business productivity, and better serve taxpayers.
As part of Making Tax Digital (MTD), companies must switch to digital records. They can do their self-assessment tax return with the help of third-party MTD-compatible software when filing it with HM Revenue and Customs (HMRC). This software will automatically process routine work like recording income.
To comply with the new rules, taxpayers using MTD for Income Tax Self Assessment (ITSA) must maintain digital records of their income and spending. They must also provide quarterly expenses and income summary updates via MTD-compatible income tax software.
Which Businesses Fall Under the MTD for Income Tax?
The MTD legislation will be subject to all landlords having rental income and businesses with an annual turnover of £10,000. Deceased estates and trusts (except for bare trusts) are also to be included in this legislation.
Other corporate partners with constituents except for persons, LLPs and LPs, and all other general partnerships will fall under the scope of this legislation.
What is the Timeline for MTD for Income Tax?
So, when does Making Tax Digital for income tax start? From April 2024 forward, taxpayers will have to pay the MTD tax.
When the new law comes into effect on 6th April 2023, all businesses that existed as of that day must comply, regardless of when their accounting year ends.
Beginning in April 2025, the regulations will apply to individual partnerships that receive revenue from a company or property but have no other partners.
Other sectors, like corporate and limited liability partnerships, aren’t required to register MTD in 2025 but must do so if new income tax rules are mandated.
Does MTD for Income Tax Have an Impact on Anyone?
About 4.2 million self-employed people with business or property income, civil society organisations, individuals, landlords, and property business owners with annual gross income over £10,000 have to pay the MTD income tax.
The government acknowledges that the population impacted would be varied. This involves approximately 2.6 million self-employed persons, 250,000 partnerships, 1 million landlords, and 380,000 enterprises generating revenue from other sectors.
The new tax system puts e-commerce sellers under pressure to identify MTD-compliant alternatives.
HMRC acknowledges that it’s impossible to keep track of every taxable supply made via an e-commerce platform like Amazon. That’s why third-party agent supply may be documented as a single invoice.
Enterprises and accountants are tackling this challenge in different ways. At the same time, software companies like Link My Books provide easy paths for e-commerce businesses to sell products or services without all the hassle.
How to Prepare for MTD for Income Tax
The government will collect your data automatically if you fall into the MTD income tax bracket. Here are the steps to take to prepare for MTD:
- Adjust Your Accounting Periods
You must make accounting and tax adjustments correctly if you own multiple business units. Speak to a professional accountant or use accounting software if you need help balancing your accounting records and periods.
- Start Digitalising ASAP
To minimise the admin overload, business owners should get their new accounting systems up and running before MTD for income tax comes into effect.
Functional and compatible software can be a lifesaver for sole traders and self-employed individuals. The digital record keeping of your trading and property income will make the income tax self-assessment process smoother.
What are the Quarterly Reporting Requirements?
Under MTD for Income Tax, you must report to HMRC in 3-month intervals. These updates must follow the tax year, not your business’s accounting year.
If you rent out a property, you need a quarterly report. This provides you with a more accurate tax estimate.
However, this will be based only on the details you submit and won’t account for any year-end changes you may make to your reliefs or assets.
There are no consequences for providing inaccurate information since the changes do not include a statement from you.
Making Tax Digital for income tax is the new legislation that affects everyone who earns more than £1000 per year. However, it aims to modernise the UK’s tax system.
It’s vital that everyone takes this new legislation seriously and understands what the changes will mean for them.
We hope that, armed with this information, you’re more knowledgeable about MTD income tax and are ready for the change.