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From April 2024, all landlords with income over £10,000 per year will be required to comply with Making Tax Digital (MTD). This will be extended to partnerships in April 2025.
Those not affected are: trusts and estates, trustees of registered pension schemes, non-resident companies and partnerships that don’t have individuals as partners and LLPs. The £10,000 threshold relates to income rather than profit, and will be based on your tax return for the year-ended 5 April 2023. The £10,000 threshold relates to the sum of all an individuals’ businesses.
MTD means individuals will need to submit quarterly income and expenditure to HMRC using digital software.
The government is introducing this to transform and digitise the UK’s tax administration system, which began with MTD for VAT in April 2019.
MTD will become mandatory in 2024. For those who don’t comply, HMRC will impose penalty points for late submissions and once maximum points are reached, financial penalties will follow. The new penalty points system will be brought in for income tax in April 2024 and is designed to be fairer to those who make occasional mistakes, and therefore to penalise only the small minority of people who persistently miss their submission obligations.
Individuals will be able to apply to HMRC for an exemption from MTD if they are eligible. The application will need to include a reason for not being able to use computers such as: age, disability, remoteness or religious beliefs. Individuals must consider if they currently submit their tax return online (whether through an agent or by themselves) or if their business uses email, as this may undermine an argument that they can’t use computers. Written confirmation of an exemption status from HMRC should be obtained in all cases. Where a business already has an exemption from MTD for VAT, the exemption will flow through to other taxes.
There will be no change to how tax is paid, despite reporting quarterly instead of annually. Tax will continue to be paid by 31 January each year, and 31 July if there are payments on account.
The old process
Individuals submit one self-assessment tax return to HMRC by 31 January each year, including details of all income and tax elections.
The new process
Individuals will need to submit the following through MTD compatible software for each business:
- Four quarterly updates of income and expenditure
- A fifth return called an End of Period Statement to finalise business profits
- A sixth return called a Final Declaration to submit any other income, gains and reliefs
All MTD income tax quarters will have the same quarter ends, and will need to be submitted one month after the quarter-end.
If you don’t have a 31 March or 5 April year-end, you don’t have to change your accounting date, but you may decide it is easier to do so after discussion with your adviser. This may trigger an increased tax liability, which HMRC has said can be spread over 5 years. Be aware of any potential cashflow impact as a result, and triggers for things like payments on account, high income child benefit charge, student loan repayments, etc.
We recommend getting your tax records together as early as possible after the year ended 5 April 2024 has passed, to allow plenty of time for any transition. The year ended 5 April 2024 is also the final tax return under the old annual process which will be due for submission in the middle of our first year of quarterly income tax returns (by 31 January 2025) so getting records in early is vital.
Other taxes such as VAT will still need to be filed separately, however HMRC is looking into ways to align your VAT quarters to income tax quarters, so submission can be done around the same time.
How can I prepare?
It’s an evolving picture and software developers continue to liaise with HMRC. We will be releasing updates throughout the process refinement stage and we will be liaising with software vendors to assess solutions.
There are some things you can do now to prepare:
Step one: Find out if you are affected by MTD for income tax
Step two: Check to see if you are eligible for an exemption
Step three: Separate your business banking from your personal banking
Step four: Consider transitioning to a 5th April year-end
Step five: If you’re already using software, check it is MTD compatible
Step six: Keep checking PKF Francis Clark’s website for updates
For more information on how MTD changes may impact you please contact your usual PKF Francis Clark adviser.