Making Tax Digital - HMRC's movement towards a modern digital tax system
VAT
For a number of years now HMRC have been ‘Making Tax Digital’ (MTD). The move towards a digital tax system initially commenced with VAT returns for compulsory VAT registered businesses, this was extended to all VAT registered businesses on 6th April 2022.
Under the MTD framework business are required to keep details of supplies and purchases made digitally. This can be done using a spreadsheet supported by additional bridging software, or more commonly accounting software, such as Sage, Xero or Quickbooks.
Income Tax
From April 2026 HMRC are extending MTD to include income tax, MTD for Income Tax (MTD ITSA) is different to MTD for VAT, meaning additional steps will still be required even for those already subject to MTD for VAT.
Initially MTD ITSA will apply to sole traders and landlords with combined trading and rental income, before expenses, of £50,000 or more per year. This will be reduced to £30,000 from April 2027. Again, a requirement to keep records digitally will be imposed along with the requirement to submit information to HMRC at least quarterly, more often if you wish. This will mean accounting records will need to be kept up to date on an ongoing basis. A separate submission will be required for each business for those with multiple trades.
In many cases a Tax Return will no longer be required, however an end of year submission along with a legal declaration will be required at the end of each year, the deadline for this will be the 31st January, the same as the current Tax Return deadline. If you do not have a 31st March or 5th April year end please read the section on basis period reform below.
At the moment there are no planned changes to the timing of any tax payments.
Partnerships and Companies
No date has yet been given when HMRC will require general partnerships (Non LLP’s with only individuals as partners) to comply with the MTD ITSA requirements.
Other partnerships and LLP’s may well be subject to MTD ITSA at a later date, however HMRC are yet to provide any further details.
MTD for Corporation Tax is currently in development, HMRC have stated that it will not be mandated before April 2026.
Basis period reform
As part of the move towards MTD ITSA HMRC are currently reforming the basis period rules which determine when profit for an unincorporated business (sole traders and partnerships) is taxed. Under the current rules a sole trader or partner is taxed on 12 months profit in the tax year those 12 months end. E.g. the profit arising in accounts made up to 30th June 2022 will be taxed during the year ended 5th April 2023. From April 2024 unincorporated businesses will be taxed on profit that arises in the tax year.
For those that do not have an accounting year ending between 31st March and 5th April, the tax year 2023/2024 will be a transition year during which you will be taxed on two profit elements.
The ‘standard part’ – being your usual 12 months accounting period.
Plus the ‘transitional part’ – from the end of your usual accounting period to 5th April 2024.
For an accounting year ended 30th June this will result in tax being due on 21 months trading income. 12 months to 30th June 2023, plus 1st July 2023 to 5th April 2024. There are provisions in place to allow profit arising during the ‘transitional’ period to be spread and taxed across 5 years.
If this affects you please call us for further information.
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