What is MTD for Income Tax?

MTD for Income Tax is part of the Government’s scheme to gradually digitise the process of submitting tax returns.

It basically means that some people will no longer submit the usual Self Assessment tax returns, and will instead be required to keep their income tax records digitally and submit updates to HMRC on a more regular basis.

Who’s affected?

MTD Income Tax (IT) is rolling out in phases depending on your ‘qualifying income’. You’ll need to comply with MTD rules if your self-employed and/or property income is:

• Over £50,000 in the 2024 to 2025 tax year
• Over £30,000 for the 2025 to 2026
• Over £20,000 for the 2026 to 2027 tax year

What counts as qualifying income?

Qualifying income is made up of the sole trader and property income you reported in the previous year’s Self Assessment tax return. Other sources of income (e.g. dividends, wages from an employer, etc.) don’t count towards your qualifying income, even if they appear on your Self Assessment.

For example, let’s say you have multiple streams of income; dividends, earnings from a side hustle arts and crafts store on Etsy, and you also get income from renting out your spare room.

HMRC uses the total of your side-hustle and rental earnings recorded in your tax return to determine whether or not you need to join Making Tax Digital.

How often do I need to send MTD Income Tax updates to HMRC?

Once you’re registered for MTD for Income Tax, you’ll need to send HMRC quarterly updates to report your income and expenses relating to any self-employed or property income from that period.

Then, after your final quarterly update, you’ll need to submit your MTD Income Tax return. This should include your self-employed and/or landlord income, as well as any other income you might have. For example, any dividends or capital gains from the time period covered by the return.

This is called a ‘final declaration’ and will replace Self Assessment if you’re now using Making Tax Digital. The deadline will still be 31st January following the end of the tax year it relates to (which makes it easier to remember!).

Do I need to keep separate records for each side hustle business?

Yes, because you’ll need to submit a separate quarterly update for each business – just like you’d report your multiple side hustles using different sections on your Self Assessment tax return.

Keeping separate records for each source of income will help to avoid confusion, making it easier to submit quarterly updates and, ultimately, your MTD Income Tax return.

Separating your digital income and expense records for each business is strongly recommended even if you don’t need to follow the MTD rules just yet. Having separate records makes it much simpler to review and understand how each business is performing individually.

At some point down the line, everyone will be registered for MTD, so why not get ahead of the curve and start digitising your records now?

Do I need an accountant to help me with MTD IT?

It’s not a requirement, so you can go it alone or you can hire an accountant to help you with Making Tax Digital (and your tax reporting in general).

Either way, an accountant can break it all down for you and simplify the process of submitting quarterly updates, as well as a final tax return. They’ll also help make sure you’re operating in the most tax-efficient way possible!

Find more help in our online accounting hub, and learn more about how to find the right accountant for your business.

The post Does MTD Income Tax Affect My Side Hustle? appeared first on The Cheap Accountants.

What is MTD?

In simple terms, it’s a government-led initiative to try and modernise the tax system, while also minimising mistakes in the process.

It’s arguably the biggest change since HMRC launched Self Assessment more than 30 years ago. Okay, but… how does it work?

Well, it aims to replace existing analogue processes with digital, or cloud-based, record keeping, the idea being that this will ultimately make it easier for people to submit their tax returns.

Some of the other proposed benefits include:

• The ability to review all your tax information from your personal digital tax account
• A faster, more streamlined process of submitting your information to HMRC
• Increased accuracy and fewer errors

Who does MTD apply to?

It currently applies to two taxes: VAT and Income Tax, but it’s not difficult to see which way the wind is blowing, and it’s likely that more taxes will be “made digital” in the future.

Making Tax Digital for VAT

Compliance with the Making Tax Digital rules is mandatory for every business which registers for VAT.

Now, how exactly do you comply?

By keeping digital records, and using compatible Making Tax Digital software to submit your VAT returns.

Making Tax Digital for Income Tax

If you’re a sole trader or landlord, this may apply to you – depending on exactly how much you earn.

Those who earn above £50,000 from self-employment and/or property will need to comply with the MTD IT rules from April 2026, followed by those earning more than £30,000 in April 2027.

The trend then continues into 2028, which is when those earning £20,000 or more will need to start complying.

In order to meet the requirements, you need to digitise all records relating to business income and expenditure, and make this a habit moving forwards.

You also need to submit quarterly updates using HMRC-recognised software and provide a Final Declaration by 31st January (following the tax year it relates to).

How do I prepare my business for MTD?

To reiterate, Making Tax Digital is being rolled out in stages, and so it will ultimately depend on the type of tax return you’re required to submit.

Generally speaking, though, you’ll need to start keeping digital records and submitting your tax information to HMRC with the use of specially designed (and approved) accounting software.

In some cases you may have to use bridging software to make the actual submission. Bridging software is basically just a means by which you can link your financial records to HMRC in a way that’s compliant with the MTD rules.

After all, not all digital record-keeping systems (such as spreadsheets, and even some bookkeeping software providers) include a direct connection to HMRC, and so you may need a way to “bridge” the gap.

What is MTD software?

MTD accounting software allows you to create digital records and make submissions to HMRC. Lots of software providers offer an all-in-one solution which can be used to both create the records and submit them. This type of software is often hosted online in “the cloud”, with data stored on several servers in multiple locations, meaning it’s protected from things like power outages, or hardware and software malfunctions.

Will my accountant make sure I’m MTD compliant?

Online accounting software means you can give multiple people access to your data, simultaneously and in real time. This means your accountant and anyone else in your business is always kept in the loop and knows what’s what.

This in turn makes it easier for them to help you maintain good and accurate bookkeeping records, as there’s no need to transfer files manually. Everyone is always working on the most up-to-date versions of things, which helps in terms of collaboration.

So, yes, your accountant can absolutely help make sure you’re complying with the Making Tax Digital rules (if you’re someone who already needs to comply).

If you’re someone who submits a Self Assessment to report sole trader or landlord income, your accountant will be able to get you and your accounts ready for when you need to start complying, which of course depends on your turnover.

What about everyone else?

Well, it’s always a good idea to be prepared, and as it looks like Making Tax Digital is the future, you might want to consider starting the process of digitising your records now – even if the MTD rules aren’t yet directly applicable to you.

That way, you’ll be ahead of the curve and won’t have to scramble to digitise your records at some unknown point down the line.

What are some other benefits of digital record keeping?

We’ve established that online accounting software provides an extra layer of security, with your data being hosted on multiple servers in multiple locations at any one time, but what are some other benefits to using it?

Well, one of these would undoubtedly be increased collaboration, as every change is universal and real-time data can be seen by anyone with access.

Your data is also generally more accessible, with you being able to view it from anywhere with a secure login and access to the internet.

 
Find more help in our online accounting hub, and learn more about how to find the right accountant for your business.

The post Are You Ready for Making Tax Digital? appeared first on The Cheap Accountants.

The Government were accused of making unreasonable and expensive demands on the self-employed and smaller businesses, and of failing to do the research, preparation and gradual implementation that such significant changes required.

Various concessions and back-tracks followed until finally, last week, the Government announced that its plan has changed.

The Government Has Listened

Making Tax Digital proposes to transfer everyone to a digitised tax record system and also included plans for a quarterly tax reporting system as opposed to the current annual requirement.

The official statement said: ‘The government has listened to concerns raised by parliamentarians, in particular the Treasury Select Committee, businesses and professional bodies about the pace of change and is taking steps to ensure a smooth transition to a digital tax system… Roll out for Making Tax Digital has been amended to ensure businesses have plenty of time to adapt to the changes.’

The Government estimate that this change will affect three million of the smallest businesses and landlords.

The New MTD Timetable

The new timetable is good news for small businesses concerned about the speed and cost of the swift change to quarterly reporting.

Under the new timetable:

+  Only businesses with a turnover above the VAT threshold (currently £90,000) will have to keep digital records, and then only for VAT purposes – this will now begin in April 2019. From that date, businesses above the VAT threshold have to provide their VAT information to HMRC through Making Tax Digital software.

+  businesses will not be asked to keep digital records, or to update HMRC quarterly, for other taxes until at least 2020

+  Making Tax Digital will be available on a voluntary basis for the smallest businesses, and for other taxes. Businesses and landlords with a turnover below the VAT threshold will be able to choose when to move to the new digital system.

+  As VAT already requires quarterly returns, no business will need to provide information to HMRC more regularly during this initial phase than they do now. All businesses and landlords will have at least two years to adapt to the changes before being asked to keep digital records for other taxes.

HMRC says it is ‘fully committed to supporting businesses in this transition’ and will continue ‘testing the system extensively with businesses.’

Financial Secretary to the Treasury and Paymaster General Mel Stride said: “Businesses agree that digitising the tax system is the right direction of travel. However, many have been worried about the scope and pace of reforms.

“We have listened very carefully to their concerns and are making changes so that we can bring the tax system into the digital age in a way that is right for all businesses.”

A Victory for Common Sense

The move has been welcomed by the many groups and individuals who expressed concern about the MTD plan.

Phil Hall, of the Association of Accounting Technicians, called it “a victory for common sense.”

National chairman of the Federation of Small Businesses, Mike Cherry, said: “We’re delighted that the Chancellor’s team in the Treasury has listened to our concerns about the mandatory aspects of Making Tax Digital, and has now decided to change their planned timetable.

“The exemption of the very smallest firms below the VAT threshold has been FSB’s top priority for reform, and now millions of business owners will be relieved.

“This is a positive decision and will be a real lifeline for small firms already facing a hugely challenging economic climate.”

Labour’s Shadow Chief Secretary to The Treasury, Peter Dowd, said: “Labour’s manifesto pledged to permanently exempt small businesses from quarterly reporting to HMRC and we are glad to have forced the Government to reconsider such an onerous measure.” However, he added: “While we recognise the huge benefits of a digital tax system, we still have great reservations about the timetable for implementation.”

The post Quarterly Digital Tax Reprieve for SMEs appeared first on The Cheap Accountants.

2020 Vision

HMRC’s vision is to have a fully digital tax system by 2020. But many critics feel this deadline, and the deadlines for the interim steps, are premature. The original plan required all businesses to provide quarterly updates to HMRC from 2018, using HMRC’s new online tax tools, but after months of consultation, the smallest businesses and landlords, at least, have been given an exception from this requirement. The government is also considering deferring some requirements for other small businesses.

However, some interested parties feel that these measures aren’t enough to help tax clients prepare for and make the change – and last week, in an open letter to the Chancellor, Treasury Committee chair Andrew Tyrie expressed his concerns.

‘Considerable Cause for Concern’

“There remains considerable cause for concern with the proposals,” Tyrie warned Philip Hammond in his letter. “Better to get it right than to stick to a rigid timetable.”

While Tyrie acknowledged that HMRC’s plans may “improve the customer experience” for some customers, he fears that their implementation “could also do much harm.”

His concerns centre on the manner and speed of implementation, and the need for meaningful consultation beyond that which has already occurred. The initial relief of businesses after the publication of consultation papers had, he said, been replaced by concerns over their content – and he expected more concerns to emerge as businesses had time to fully digest the papers.

He called particular attention to HMRC’s guidance on the information required for digital record keeping. “The new requirement for digital record keeping and reporting is far more than simply entering a handful of totals  which could come easily from paper or an Excel spreadsheet) into an online VAT return,” he said. “It is tantamount to prescription by HMRC, for the first time, of a particular form in which accounting records must be maintained.”

Small Businesses Will Be Hardest Hit

While Mr Tyrie welcomed the exemption for businesses with a turnover of under £10,000, he pointed out that this is below the level of the Personal Allowance – and so only applicable to non-taxpayers, “including new businesses who would otherwise be obliged by MTD to notify HMRC within four months of starting a business. In such cases, there would be no benefit, to the businesses or to HMRC, if they were to submit quarterly reports.”


He also fears that businesses with a turnover of just over £ 10,000 will be the hardest hit if they’re required to prepare tax returns four times a year (or employ a bookkeeper to do so).

Details Remain Unclear

Mr Tyrie also expressed concerns over details that remain unclear, such as:

* How long free tax tools for small businesses will remain free (and which sizes of business will be eligible or ineligible for them)
* How quarterly tax returns will match up with monthly Universal Credit updates

The chancellor wants HMRC to provide legislation for the plans in next year’s Finance Bill, meaning draft proposals would be expected at the end of November 2016. However, the consultation closes on 7^th November, and Tyrie has warned that this leaves an inadequate period of time to consider responses to the consultations and make any changes necessary before the draft proposals are issued. In his letter, he presses for an extension and pilot schemes to provide useful feedback “well before digital reporting is made mandatory.”

How has Making Tax Digital affected you and your business – has your customer experience improved? How will quarterly tax returns affect you? Share your thoughts.

The post Make Tax Digital: Too Much, Too Soon? appeared first on The Cheap Accountants.