Making Tax Digital (MTD) came into effect in April 2019 and forced the majority of VAT-registered businesses to completely change the way they filed their returns.
Designed to increase the adoption of digital bookkeeping (under the guise of making it ‘easier’, of course), it caused plenty of headaches for businesses which had, until then, relied on processes for VAT returns which were decades old.
We’re well over a year into MTD now, and most of those initial hurdles have been cleared. However, there’s another one on the way and it relates to people who file returns for income tax.
The changes are some way off (April 2023, to be exact), but they could have profound impacts for those affected.
From April 2023, anyone who is receiving self employed or property income with a turnover above £10,000 will have to comply with MTD.
If you fall into that bracket and currently undertake paper-based or homemade digital bookkeeping (i.e. you’ve created something on your own spreadsheets), you’ll need to switch to a government approved system for filing your returns.
The new rules will also apply to trusts and partnerships, but there will be exemptions for any sole traders or organisations who sit below the £10,000 turnover threshold.
What software will I need?
Thankfully, the introduction of MTD last year has prompted most if not all accounts software vendors to update their systems. So, if you opt for a platform like QuickBooks or Xero, or the many other packages out there you’ll have all the tools you need to be compliant with MTD.
The government has also suggested that free software for income tax will also be made available for businesses with very straightforward accounting requirements, although it’s best not to rely on any promises made there.
If you’re using spreadsheets to record transactions, there’s a good chance you’ll still be able to use them, but they’ll need to be one of the following:
- compatible with the government’s MTD API; or
- used in combination with an MTD-compatible software product.
The requirements for digital record keeping under MTD are actually pretty straightforward. You simply need to maintain them, preserve them, and provide quarterly updates to HMRC.
Our advice would be to opt for a cloud-based accounting platform which will save you plenty of time and remove any headaches associated with home baked spreadsheets.
What records will I need to keep?
The good news is that if you’re already a diligent record keeper, you’re probably already doing a lot of the leg work for MTD.
Similarly, you won’t need to scan and store invoices and receipts if you don’t already. Under MTD you can continue to keep documents in paper form, but each individual transaction (i.e. not the summaries which often appear on invoices) will need to be recorded and stored digitally.
HMRC is keen for records to be stored in real time where possible, but if you’re the sort of person who likes to do it all in one go at the end of a quarter, that’ll be fine, too.
Although the rules may change between now and MTD’s introduction, these are the transactional records you’ll need to maintain digitally:
- the amount of each transaction;
- the date of each transaction (either based on cash or traditional accounting); and
- the category of each transaction (you can find these listed on the self assessment return forms SA103F and SA105).
How often will I need to submit?
You’ll be glad to hear that there’s some flexibility built into MTD.
Under the new rules, you’ll be able to choose the period of accounting and how often you update HMRC. The basic requirement is four quarterly updates each year, and while HMRC isn’t allowed to request updates more frequently than that, you’ll be free to submit extra updates if you wish.
The updates will need to include what is known as ‘three line accounts’. This simply means the income, expenses, and profit for that period. Despite this, you’ll still need to record the transactional detail we noted above.
It’s important to note that if you have several businesses, you’ll need to file a quarterly return for each. For instance, if you have a business and a property, both of which fall within the MTD threshold, you’ll need to file eight quarterly returns.
You’ll have until 31st January after your assessment year to finalise the taxable profit as normal through your self-assessment tax return.
Remember – things can change!
We’re still a little way off MTD becoming mandatory for micro business owners, and the rules and requirements could therefore change.
This is what we know now, and so the best advice is certainly to start looking at cloud-based accounting software if you haven’t already switched. It’ll require some investment, but that will pay you back once MTD comes into effect, because you’ll be one step ahead of everyone else and it is a lot easier to manage.
If you’ve got any questions or concerns about these changes, the Chandlers team is here to help. Just get in touch and hit us with your queries!