Making Tax Digital is the government’s digital tax initiative designed to modernise the UK tax system. It aims to make it easier for businesses to submit their tax returns accurately and keep track of how much tax they owe throughout the year.
Making Tax Digital is already live for VAT and the deadline for MTD for income tax is fast approaching.
From April 2024, all self-employed sole traders, contractors and landlords whose income exceeds £10,000 per year will be required to comply with Making Tax Digital for income tax self assessment. This means they must submit quarterly and annual returns to HMRC using compatible accounting software.
After this time, paper records won’t meet tax legislation requirements and failure to make submissions to HMRC using the right software will incur penalties.
What is Making Tax Digital (MTD)?
Making Tax Digital (MTD) is part of the government’s vision to digitise the tax system, in order to make it more efficient and reduce the margin of error. According to HMRC, Making Tax Digital
“helps taxpayers get their tax returns right by reducing common mistakes as well as saving time managing their tax affairs and is a key part of the overall digitalisation of UK tax.”
MTD will eventually make it mandatory for small businesses and the self-employed to complete digital tax records and returns, so that the tax system becomes completely paperless.
Making Tax Digital for VAT
Making Tax Digital for VAT was launched in April 2019, requiring all VAT registered businesses with an income exceeding £85,000 per year to keep digital accounts and file VAT returns using MTD-compatible software.
Since January 2022, all voluntary VAT registered businesses (i.e. those registered for VAT under the VAT registration threshold of £85,000) have also been required to comply with MTD.
Does Making Tax Digital apply to self-employed people?
MTD for ITSA was announced in 2020. The rules will apply to sole traders, contractors and landlords turning over above £10,000 from April 2024 (pushed back from 2023, due to the pandemic).
Under MTD for ITSA, you must keep digital records and use HMRC approved software to submit your tax returns. This means that most self assessment taxpayers will need to go some way towards digital bookkeeping and accounting to remain compliant.
Bear in mind that the MTD for ITSA is different to the system for VAT returns (MTD for VAT), so VAT registered businesses will be required to use both systems.
When should I start to keep digital records?
The well-trusted cloud bookkeeping software provider, Xero, has been building and testing an MTD for ITSA solution, which a select number of businesses have been using since April 2022, as part of a pilot scheme.
Sole traders who want to start using compatible software now (either on their own volition or via their bookkeeper or accountant) can now use Xero’s fully tested end-to-end solution ahead of the 2024 deadline.
Many accountants, such as CloudCo, already use Xero’s efficient system and are ready to take up the increased volume of self-employed people who will to be using MTD for ITSA.
Anyone can sign up and join Xero’s system online today.
Making Tax Digital for income tax – when is the start date?
Making Tax Digital deadlines will follow business’s accounting periods.
Businesses whose tax year follows the standard tax year have a digital start date is 6 April 2024.
Businesses that don’t follow the standard tax year, their digital start date will begin on their accounting period start-date, on or after 6 April 2024.
The deadline may seem a way off now, but it’s probably advisable to start getting used to MTD rules now so that you’re sure you’re meeting all the requirements later.
What do I need to submit to HMRC?
From the digital start date, all self-employed taxpayers earning over £10,000 must use software to keep digital records of invoices, bank statements, receipts, and all statutory paperwork.
They will be required to submit the following in a recognised digital format:
- Four quarterly updates to HMRC detailing: income and expenses
- One annual end-of-period statement EOPS per business (so if you have more than one business, income from property, one for each business or income source).
- One annual ‘final declaration’ submission per individual. Here you will share details of all other taxable income, including investments and savings interest. This is the point at which you’ll claim any allowances and reliefs.
By logging quarterly accounts in this way, it will be easier for the self employed to keep a track of how much income tax they owe, and plan accordingly.
How will Making Tax Digital affect sole traders?
Under Making Tax Digital, anyone not taxed at source (via PAYE) and earning over £10,000 from one or several sources (e.g. business or property income) must comply from April 2024.
They must keep digital accounts of their income and expenditure, send a quarterly summary of income and expenses, and an end of year report, using MTD-compatible software.
Non-compliance will result in daily penalties between £5 and £15 per day, which could result in financial difficulties for a lot of self employed people.
Is there a cost involved?
There will be some cost involved, although most online/digitised bookkeepers and accountants offer cloud bookkeeping and accounting software as part of their packages.
Business owners who don’t currently have an accountant or don’t already use cloud-based software are likely to face a one-off charge and ongoing costs.
While the government has probably estimated costs at £70 a year over four years for MTD implementation per business, The Institute of Chartered Accountants in England and Wales puts it at around £1,250.
If you sign up independently with an MTD-compatible provider like Xero it could be between £12 and £33 per month. Remember that whichever software or app you choose, it must be MTD for ITSA-enabled, and capable of receiving information from HMRC digitally via HMRC’s application programming interface (API) platform.
Which software should I choose?
Using ITSA compatible software will enable eligible self-employed people to keep digital records of income and expenses and submit their quarterly updates and annual submissions directly from the platform.
HMRC’s list of compatible software includes market leaders Xero, Quickbooks and Zoho. It’s important to choose one that works for you and your business, with advice from your accountant.
CloudCo is a Xero certified advisor and we can help you unlock valuable features like invoicing and expense capture to reduce the administrative burden of digital record keeping.
Xero will be adding new features to support bookkeepers, accountants, sole traders, landlords as the MTD deadline approaches and the Xero resource hub will keep you up to date with the latest on their MTD for ITSA page.
How do I register for MTD for ITSA?
You could sign up for MTD for ITSA here on the HMRC website, but you will also have to register for MTD for ITSA via your cloud-based-compatible software.
Your bookkeeper or accountant can also register as your agent and submit your quarterly updates, EOPS and final declarations using their cloud-based accounting software on your behalf.
To sign up and register you will need:
- Name of your business
- Date you started your business
- Email address
- National insurance number
- Accounting period
- Accounting type
Read HMRC’s guidance on signing up here. If you use a bookkeeper or accountant, you can ask about signing up for MTD for ITSA now, giving you plenty of time to get familiar with the system.
CloudCo can help you get MTD ready
If you are a self employed sole trader with questions about how Making Tax Digital affects you, then the experts at CloudCo can help. We can provide valuable advice and guide you through the process of keeping your accounts digitally, with accounting software Xero.
For a free accounting quote and consultation, please get in touch.
Can a sole trader use spreadsheets for MTD for income tax?
You can still use spreadsheets to record your accounts under MTD, but you will need to use bridging software to translate the data for your submissions to HMRC.
Can a sole trader still submit paper self assessment returns under MTD?
Under Making Tax Digital for self assessment, you will no longer be able to submit a paper tax return. You must submit your returns to HMRC digitally, or you will not be compliant with the new tax legislation.
Is Making Tax Digital compulsory for sole traders?
When MTD for income tax comes into effect from April 2024, it will be compulsory for all sole traders with a combined income of £10,000 per year or more.
There’s no time like the present! Most of us take some time to get used to new systems, so when it comes to Making Tax Digital, it’s best start now. By signing up with Xero MTD for ITSA-compatible software you can ensure you are well prepared for the April 2024 deadline.
There are other cloud packages you could choose to use too, just make sure they’re compatible with HMRC.
The pilot lets you keep records digitally and file tax updates with HMRC instead of filing the usual self-assessment tax return. So far, around 30 per cent of businesses and landlords have signed up voluntarily according to HMRC estimates.