Making Tax Digital – Guide For Self Employed & Income Tax

The government’s Making Tax Digital (MTD) initiative aims to replace the old tax return process with a completely paperless system by the end of 2023. Creating a new interlinked online framework, MTD makes it as easy as possible for you to stay on top of your finances and pay the right tax without the need for stressful annual returns.

Larger businesses and limited companies have already been getting used to MTD for VAT returns since 2019. However, this new way of working is being gradually extended to cover income tax and all sizes of business. Compliance will soon become a legal requirement for Self Employed individuals, with fines and penalties in place for those who don’t meet the requirements.

How ready are you for these changes? Read on to learn more.

When will MTD for income tax and the Self Employed come into effect?

If you file income tax returns using self-assessment for income from business or property of over £10,000 per year, then Making Tax Digital will become compulsory from April 2023. This means you’ll need to keep digital financial records and use compatible software to submit quarterly updates and tax returns.

While this deadline might seem a long way off, it’s definitely worth getting prepared so your dealings with HMRC run as smoothly as possible ahead of time. Rather than find yourself scrambling to get systems in place at the last minute, you can start using MTD now by enrolling in the government’s pilot scheme for the Self Employed. More on that below.

Understanding the Making Tax Digital timetable and deadlines

Here’s a basic overview of how MTD is being introduced:

• April 2019: VAT-registered businesses with a taxable turnover above the VAT threshold of £85,000 are obliged to keep digital records and submit digital VAT returns using compatible software. A six-month deferral was granted to some ‘more complex’ businesses.
• October 2019: Compliance with Making Tax Digital required of those ‘more complex’ businesses who were deferred.
• April 2021 (deferred from April 2020 due to the COVID crisis): MTD Phase 2 (as detailed in this guide) requires those businesses above to apply MTD to every stage of the VAT journey, not just the returns.
• April 2022: All VAT-registered businesses, regardless of their taxable turnover, will be required to use MTD (although they can use it voluntarily before this date).
• April 2023: MTD will apply to all taxpayers who file Income Tax Self Assessments for business or property income of more than £10,000 a year.

While MTD will become a legal requirement, making yourself compliant does also come with quite a few benefits. For example:

• Greater efficiency: MTD streamlines how you work currently, so that in most cases you will no longer even need to enter any figures manually. Information from invoices, payments, bills, transfers, etc, can be sent directly to your accounting software, minimising physical input and drastically reducing the possibility of error.
• Saves time: With the efficiency measures mentioned above will come a significant saving in the amount of time you need to spend updating spreadsheets, corroborating figures, locating paperwork, and so on. You will also no longer need to spend a long time filling out your self-assessment return once a year.
• No paperwork: Going digital means you’ll never have to print out hard copies of documents, keep lengthy files, store physical papers, send forms in the post or add to your recycling stack. You’ll also avoid accidental loss or damage to any vital records. Everything is on a drive or in the Cloud.

Getting yourself ahead of the curve and introducing MTD systems early may mean you’re able to make business decisions and forecasts more quickly than you expected, or at least free up time for you to do what you do best!

Making Tax Digital for Sole Traders

Self employed people and landlords operating as Sole Traders will come under the MTD system for Income Tax and VAT from 6th April 2023, if their annual taxable revenue from their work or property is over £10,000.

Making Tax Digital – Self Assessment

If you are currently submitting returns via the self-assessment system, then you will need to anticipate the changes under MTD from one single return per tax year, to five new reporting obligations during that 12-month period.

How many tax returns will I need to do per year once Making Tax Digital is rolled out for the Self Employed?

You will need to make five submissions detailing your income and expenses to HMRC during the tax year under MTD. You’ll then be able to see a statement of how much tax you owe. The schedule will look like this for the year 2023-24:

• Your first tax return will be in the third month of your accounting period. For example, if your tax year ends on 31st March or 5th April, then your first return should be made by 31st June 2023 or 5th July 2023.
• Thereafter, you will need to send reports to HMRC every 3 months. Following on from above, the next three reports would be:
  • Second report: 31st September or 5th October 2023
  • Third report: 31st December 2023 or 5th January 2024
  • Fourth report: 31st March or 5th April 2024
  • And then the cycle continues every 3 months ongoing.
• You’ll also need to submit a fifth and final year-end report for HMRC to use as a basis for the final amount of tax you owe for that year. This is also when you’ll also be able to claim any allowances or reliefs. The deadline for this is likely to be the same as currently, i.e. end of January the following year. In this case, for tax year 2023-24 it would be 31st January 2025.
• Don’t forget that in this first year of using MTD, you will also need to submit your self-assessment tax return for the previous financial year: 2022-2023. The deadline for this will be 31st January 2024.

To facilitate this reporting, you will need two things:

1. Accounting software or an app compatible with the MTD system, or a type of ‘bridging software’ to link your digital spreadsheets to each other and the MTD portal.
2. A reliable internet connection and the capability to store your electronic information on your own drive or remotely where it’s secure but easy to access.

Which will be the first income tax year to be affected by Making Tax Digital?

According to the current timetable, with MTD coming into effect for all tax-payers with revenues over £10,000 from 1st April 2023, the first full tax year to be affected will be 2023-34.

Digital Tax for the Self Employed

Although most aspects of MTD will be automated through your accounting software, there will still be room for flexibility.

• You will be able to change your tax year and/or quarters. Your end-of-year report would then be due ten months after the end of your financial year.
• Details are still being finalised, but you will be able to voluntarily make tax payments as you go, rather than larger sums further down the line.

In order to smooth cash flow, HMRC might also possibly ask for four payments per year on account, tying in with your submissions, with the aim of making payments more closely linked to your current situation.

MTD – Self Assessment pilot

As mentioned earlier, to avoid scrambling to implement new accounting systems at the last minute in 2023, you can start with MTD now by registering for the government’s pilot scheme.

Aimed at those who currently file their tax return using Self Assessment, you are able to set up everything you need to store your accounting data digitally and ensure all the necessary links are in place for smooth, regular reporting to take place. The government estimates that around 30% of Sole Traders and landlords have already done so voluntarily.

Using the pilot MTD scheme for the Self Employed means you’ll be able to iron out any teething problems and get your financial reporting in shape ahead of when you need to be legally compliant. The real-time approach will also help HMRC to spot any issues and streamline the system ready for full implementation.

For more information on Making Tax Digital for income tax if you’re a Sole Trader or landlord submitting tax returns via Self-Assessment on the government’s website.

Self Employed – Making Tax Digital penalties

Just as with the current system, there’ll be penalties to businesses for late filing and non-compliance, but much will remain the same. The important points to remember are:

• During the first year of MTD, there will be no penalties for late payments. This is to allow people to bed their systems in. After this, penalties will resume as usual.
• Penalties for errors in returns or documents are already in place and will not change.
• Similarly, interest charges on late payments are already applied and will remain the same.

What technology do I need as a Sole Trader for Making Tax Digital?

Every business is different in their own unique ways, and the software, hardware and applications you need to use will vary according to how you are set up.

• If you use an accountant, tax adviser or bookkeeper to look after your accounts and submit your tax returns, you can continue to do so. They should have all the necessary software.
• If you already use digital accounting software, then it may be a simple task to ensure your network is properly connected so your data is processed correctly and reports are filed to HMRC as they should be.
• If you do not use any professional help to submit your returns to HMRC, and do not yet use accounting software or digital spreadsheets, then you will need to decide which system will make the most sense to use.

To find out exactly what will work best for your business, take the time to talk over your needs with a financial professional. They’ll be able to make recommendations based on the complexity of your transactions, the nature of your services or products and your turnover.

Need help with Making Tax Digital?

Confused about how MTD will work with your business? Or need help setting up compliant digital systems? Scrutton Bland’s MTD experts will quickly identify the most favourable options available to you and get your business ready for Making Tax Digital.

With our SB digital you’ll learn whether you need to introduce new systems, upgrade your existing software or use bridging software to link to HMRC. And our team could even apply to HMRC for an extension if circumstances merit it.