MHA | New rules for Making Tax Digital on horizon

New rules for Making Tax Digital on horizon

Victoria Dadswell · January 11th 2023 · read

Making Tax Digital 1

All VAT-registered businesses will now be filing their VAT returns under Making Tax Digital (MTD), with HMRC's portal shut from 1 November 2022.

The only way therefore now to file a VAT is by using MTD-compatible software.

Making Tax Digital (MTD) for Income Tax Self Assessment (ITSA)

MTD for ITSA originally mandated all landlords, sole traders and partnerships turning over more than £10,000 per annum to comply with new rules that were due to be introduced on 6 April 2024.  

However, HMRC announced on 16 December 2022 that the introduction would be delayed until 6 April 2026 giving taxpayers and software providers an additional two years to prepare.

Additionally, HMRC will also be mandating that businesses with turnover over £50,000 will need to comply with the rules from April 2026. Furthermore, those organisations with income over £30,000 will be mandated from April 2027. HMRC are yet to announce when general partnerships will now be mandated.

Whilst many businesses now use software for their record keeping, this will represent a major change for landlords who only prepare an income and expenditure statement when preparing their tax return.

There are two aspects to MTD for ITSA which must be complied with:

  1. Digital record-keeping
  2. Quarterly filings to HMRC of all income and expenditure

While the date of MTD has been pushed back to 2026, many landlords may still benefit from using software to maintain their records now.

Landlord bespoke software can offer other benefits. Payment tracking, renewal reminders for insurance and safety certificates per property are all features which are included within bespoke software. You can also get advice on legislation changes.

Change of year basis

In preparation for MTD for ITSA quarterly filings, HMRC also announced changes to the taxation of sole traders and partnerships with a non-31 March or 5 April year end.

At present, profits are taxed according to the tax year in which the accounting year end falls.

In the first years of trade the ‘opening year rules’ must be applied, which can create double taxation of some profits, called overlap profits. Any overlap profits are then relieved on cessation of the business or upon the retirement of a partner.

From April 2024, HMRC will tax all unincorporated businesses on a tax year basis rather than an accounting year end, with 2023/24 being a transitional year.

We envisage that many accounting year ends will transition to 31 March, unless there is a strong commercial reason for a different year end.

The transitional rules in 2023/24 allow for excess profits falling to be taxed in this transitional year to be spread over five tax years.

How will this work in practice?

A sole trader has a year end of 30 June. The profits to 30 June 2023 are £30,000 and for 30 June 2024 are £60,000. They have overlap profits brought forward of £5,000.

Taxable profits for 2023/24 are:

1 July 2022 – 30 June 2023£30,000
1 July 2023 – 31 March 2024£45,000 (£60,000 x 9/12)
Less: overlap profits(£5,000)
Taxable profits 2023/24£70,000

As these profits exceed the current year profits of £30,000 the excess of £40,000 can be spread over five years. The minimum amount per year to be added is £8,000 (40,000/5). An election to spread the profits would therefore see 2023/24 taxable profits of £30,000 + £8,000 = £38,000.

£8,000 would then need to be added to the taxable profits for the subsequent four tax years.

Take action

If you are a self-employed individual or a landlord, then it is time to start to consider what necessary steps you may want to take now to aid with the transition to Making Tax Digital.

Do not leave this until April 2026 as advisers and software providers will be extremely busy.

Making Tax Digital for Corporation Tax

No date for Making Tax Digital for Corporation Tax has yet been set. However, HMRC has said that this will not occur prior to 2026.

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