Making Tax Digital: What you need to know

If you have not heard of the strapline ‘Making Tax Digital’ yet, you soon will. If your business prepares VAT returns, then you should already be aware of some of the new requirements.

Since 2019, all VAT registered businesses with a turnover of £85,000 have been required to submit their VAT returns under making tax digital rules. From April 2022, this requirement was extended to all VAT registered businesses.

The next stage of the Making Tax Digital plan is to extend the rules to include the reporting of income tax. This will be mandatory for all self-employed businesses and individuals with property income from April 2024 if your business turnover plus any income from rent is over £10,000.  Although this seems quite a long time away, businesses and landlords really do need to start thinking about how they will deal with the changes so they don’t leave it to the last minute.

The rules will then be applied to general partnerships from April 2025. It is intended for Making Tax Digital to also be applied to corporation tax, however, there is no planned date for this yet.  HMRC has indicated that it will not be before 2026.

Requirements of Making Tax Digital

• All transactions must be recorded digitally using a compatible software package or other software such as a compatible spreadsheet.
• If you are using more than one piece of software to record your transactions then they must be digitally linked.
• You must be able to submit any returns including VAT returns directly from the software to HMRC.

For Income Tax

• You must submit a quarterly update summarising your business income and expenses for each quarter. This must be submitted within one month of the quarter end. The quarter end dates will be 5 July, 5 October, 5 January, and 5 April, although you can choose to use month end dates of 30 June, 30 September, 31 December, and 31 March.
• You must submit an end of period statement. This is a summary of your businesses annual income and expenses including any accounting adjustments and reliefs that you are entitled to. You will also have to confirm that any information submitted is correct and complete. The end of period update must be submitted by 31 January after the end of the tax year.
• You must submit a final declaration. This replaces your tax return and will include any personal income received in the year. This must be submitted by 31 January following the tax year end.
• Any tax payable is still payable by 31 January following the tax year end as it is now.

Basis Period Reform

Running alongside making tax digital is the “Basis Period Reform”. This will mean that all self-employed businesses and partnerships will be taxed on profits for the year to 31 March or 5 April each year irrespective of their accounts year end.

In the transition year, businesses that do not have a 5 April or 31 March year end will have two chargeable periods in one tax year which could result in a higher tax charge for that year.

Depending on profits, expected profits, and any overlap relief that is available it may be advantageous to consider changing your year end earlier than the transition year and so it is worth discussing this with your accountant as soon as possible.

More requirements

As you can see there will be significantly more reporting requirements under making tax digital.  At present a self-employed person not registered for VAT must submit one document a year – the annual self-assessment tax return.

Once they are reporting under making tax digital, they will have to submit Six returns being four quarterly returns, an end of period statement, and a final declaration. The self-employed will need to keep up to date with their records, as it will no longer be an option to record income and expenditure in one go, after the year-end has finished.

Given the significance of the upcoming changes it is important to prepare for them as early as possible. You should discuss your options with your adviser so that a plan can be put in place.

Key dates

April 2022           Making tax digital became mandatory for all VAT registered businesses.

April 2024           Making tax digital for income tax will be introduced for self-employed businesses and individual with property income with a turnover exceeding £10,000.

April 2025           Making tax digital for income tax will be introduced for general partnerships.

2026 onwards  Making tax digital will be introduced for corporation tax no earlier than 2026 although no date has yet been confirmed.[/vc_column_text][/vc_column][/vc_row]