For anyone working in professional services, the Making Tax Digital scheme probably feels like it's been around for decades.
The implementation of the government’s flagship tax initiative, which was designed to allow the taxation process to be conducted in real time by making better use of information through a single financial account, has experienced its fair share of delays since it came in law in 2017, but has now finally come into full effect for VAT payments.
From April this year, all VAT-registered businesses have to keep VAT records digitally and send returns using Making Tax Digital (MTD) compatible software, regardless of their turnover, and must keep digital records of invoices, receipts and other documentation.
With this objective achieved, HMRC’s attention is now turning to the next stage of the initiative, which covers what’s being called MTD Income Tax Self Assessment (ITSA) – and as with previous phases of the programme, it will require those that need to comply with these new rules to plan carefully and well in advance for how they do so.
From April 2024, MTD will apply to taxpayers and sole traders who file income tax Self Assessment returns for gross business or property income of more than £10,000 a year.
Quarterly accounts will need to be submitted, and while there is expected to be a bedding in period to enable everyone to get used to the new arrangements, the usual spectre of HMRC penalties will underpin the regulations.
Two years may seem a long way away, but in reality, preparations for dealing with MTD ITSA will need to start well in advance on this date, with the most pressing question being whether you’re going to be impacted by the changes.
We’re already working with clients to examine their individual situations and how their incomes might be streamlined to best fit with the new rules, and it’s already obvious that there’s not going to be any kind of ‘one size fits all’ solution.
There’s also the question of how individuals’ entry into and exit from the system will be managed if, for example, they draw an income from property rental for a certain period of time before taking their property out of the rental market.
Each individual case will be different, and there will be a much greater imperative for people to be organised in getting their financial documentation ready to specific deadlines.
This will be of particular note to people using agents to let out their property – will the agents provide the necessary information, and will they charge for doing so, or will the owner need to collate it for themselves?
HMRC has yet to provide any free software to help people comply with their evolving responsibilities, as was the case with the initial introduction of Making Tax Digital, and part of our present work is looking at whether individuals would benefit from having some sort of cloud-based accounting software package available into which they could upload all the required information.
HMRC will doubtless publish more information about the practicalities of the new regulations sooner or later, and I’ll doubtless be returning to this subject in the future too, especially as, from April 2025, MTD will apply to general partnerships with a turnover of more over £10,000, excluding Limited Liability Partnerships and partnerships with a corporate partner.
In the meantime, experience of the introduction of MTD for VAT very much suggests that the sooner you begin to look at how the new rules are going to impact on your current financial arrangements, and the more you can be preparing early for mitigating this impact, the easier the new rules will be to manage when the time comes
