Income Tax Self Assessment and Making Tax Digital

Parliament enacted the Income Tax (Digital Requirements) Regulations 2021 (S1 2021/1076) for MTD ITSA on September 23, 2021, paving the path for MTD ITSA to begin on April 6, 2024. This is a one-year delay from the original intention to implement MTD ITSA in order to give companies more time to recover from the epidemic.

We understand that many small business owners are unsure and apprehensive about what Making Tax Digital for Income Tax Self Assessment implies for them and their company. But you don't have to worry if you have the correct information, direction, and preparedness.

Everything you need to know is right here!

What exactly is it?

Making Tax Digital for Income Tax Self Assessment (abbreviated MTD for ITSA) is a new method of reporting earnings to HMRC. It is part of the government's goal to become one of the world's most technologically sophisticated tax authorities while also delivering a digital service that many people have come to anticipate in their daily lives.

"The digital tax system we are constructing will be more efficient, make it easier for consumers to pay tax right, and deliver wider advantages in greater productivity," says Luzy Frazer, Financial Secretary to the Treasury.

The transition to digital should provide you with a better knowledge of your firm. You'll be aware of your tax responsibilities far earlier, and you'll be able to manage cash flow and make more educated decisions than ever before.

Who is impacted?

MTD for ITSA will apply to you if you earn more than ￡10,000 per year from:

Self-employment

Individuals are the only partners in general partnerships.

Real estate firms

This implies that from 6 April 2024, all sole traders and individual landlords with a revenue (not profit) of more than ￡10,000 who are in business on 5 April 2023 must comply with MTD standards. The turnover criteria cover all sole-trader business income as well as rental income. General partnerships will be exempt from MTD for ITSA until the tax year commencing in April 2025.

Who is not exempt?

You can check with HMRC to see whether you are eligible for an exemption or to opt-out of Making Tax Digital. Essentially, you may also request an extension if it is not "reasonable or practicable" for you to deploy the technology necessary to comply with MTD for ITSA standards.

What this implies to you

Business owners and landlords who are affected will no longer be required to file an annual self-assessment tax return. Instead, using MTD-compatible software, each firm will be required to file four quarterly updates, an End of Period Statement (EOPS), and a Final Return with any further income, profits, or reliefs to HMRC.

That bears repeating. Instead of submitting a single tax return each year, you will be required to file six different returns. And if you own more than one self-employed firm or are a landlord, you must file two or more quarterly updates each quarter!

HMRC has said that MTD will not alter when it comes time to pay your tax. We wouldn't be shocked if this changed in the future.

The normal quarterly submission dates will be the 5th of July, the 5th of October, the 5th of January, and the 5th of April. The deadlines for reporting are precisely one month later.

What does it mean to use MTD-compatible software?

The necessity to retain digital accounting records and file tax returns using MTD-compatible software is the most significant change. There will be many possibilities available; make sure you take the time to seek anything that will help you manage your business more efficiently. It's tempting to get caught up in how tough the transition will be. However, there are several advantages for firms that keep up-to-date digital documents. If you want to learn more, check out our guide on using Xero as a landlord, as well as some of our best practices for getting the most out of Xero.

What could possibly go wrong?

There will always be issues while implementing a new system. The major issue here is that there will undoubtedly be work overlap between the present Self Assessment Return system and the new Making Tax Digital obligations. This is exacerbated if your fiscal year ends on a date other than April 5th.

What you should do next

As you can see, there is some overlap between completing the Self Assessment tax return for 2023/24 and the first two MTD for ITSA quarterly submissions to HMRC. Small company owners may face additional labor and uncertainty as a result of this.

However, like with everything, planning ahead of time may save you worry and time. Our suggestion is to not put off preparing for these changes. The more time you give yourself to get things in order and iron out any kinks, the easier the move will be.

If you’d like more advice on how you can get your business ready for MTD for ITSA, you can?contact us