Making Tax Digital (MTD) is part of the government’s plan to make it easier for individuals and businesses to get their tax right and keep on top of their affairs.
More specifically it is the introduction of compulsory requirements to keep and file information digitally (via computer) to HMRC. Some of the requirements are a case of replacing existing processes with new digital approved options, and others see a complete change to filing requirements.
The story so far… VAT
VAT was the first tax to come under the remit of MTD and VAT registered businesses with taxable turnover over the VAT threshold (£85k) are now required to follow the MTD rules, which include filing their returns from approved software, plus ensuring they are following new rules on keeping their records digitally, including the use of bridging software to link accounting records that are not part of the same accounting software.
You can join the scheme voluntarily if you wish.
Note that VAT-registered businesses with a taxable turnover below £85,000 will be required to follow Making Tax digital rules for their first return starting on or after April 2022. This will see smaller VAT registered businesses needing to file their returns from either approved accounting software or MTD enabled spreadsheets.
What is next? Income Tax & Corporation Tax
Corporation Tax won’t see MTD requirements come into force until at least 2026 – but we generally feel limited companies are already familiar with HMRC filing requirements.
The big change hits the self-employed businesses (sole traders & partnerships) and landlords with income over £10k, with MTD rules coming into force in April 2023.
This will be a significant change as those falling under MTD for Income Tax will be required to file quarterly returns to HMRC, summarising your business income and expenses. Just take a second to appreciate this.
This is an individual with one or two rental properties. This is an individual operating a new start up business, turning over £30k from a back bedroom. This is a retired employee who still does a bit of consultancy work.
This is all individuals who could previously bundle up their records at the end of the tax year and give them to their accountants to rattle of a tax return and all with turnover well below the VAT threshold. They will now need accounting software to keep their records up to date and will be required to submit returns to HMRC every 3 months.
This is a huge change.
Are there any silver linings?
MTD for Income Tax is set to happen next year, but are there any advantages for the individuals affected and are there any benefits in getting ready early?
At Streets are have always been advocates for the use of accounting software, but we are also commercially minded and know that the benefits should be for the business owner, not just HMRC.
Below we consider a current case study of a husband and wife team adopting accounting software to keep their records straight (and unintentionally getting themselves MTD ready a year early).
Case Study – using accounting software for Self Employed & Landlord businesses
We have worked with the couple in our case study for many years, and they are familiar with the requirements for larger limited companies to have full accounting software records as they ran a successful VAT registered limited company for many years.
They also own privately a couple of residential properties that they let out, and the wife runs a small equine centre offering livery. Historically, they kept their bank statements and a folder of related receipts. At the end of the year these were duly delivered to the office (normally late December!) for our tax team to prepare their income tax returns for the 31 January deadlines.
Their records were always ‘fine’ and we could prepare the required work, although the use of the wrong bank accounts for paying for costs, or recording cash expenses could sometimes be tricky to unpick.
At the beginning of this year the couple started a new limited company and decided that along with putting this onto Xero they would set up Xero records for the rental properties and the equine centre.
As accountants, we are fans of accounting software, not something you tend to hear from clients, but it is in this case with ‘I love Xero’. In early May this year (7 months earlier than normal!) we had completed the records for the rental and equine businesses and these were sent to our tax team.
With the rental income (with the use of tracking in Xero) they now have records clearly showing the income and related costs for each property, giving insight into the return each property yields.
With the equine centre we have ensured that where costs were settled in cash (rather than via the bank account) these costs don’t get forgotten, ensuring their tax bill accurately reflects the true cost of running the business.
One of the biggest changes in using Xero is the business owners are now being much stricter with themselves to use the right bank accounts to pay for the respective business costs and make sure they get full tax relief on all costs. They also love being able to see clear records for each part of the business. With bank feeds and the scanning of purchase invoices into Xero they are also now ‘paper free’. We aren’t sure who is the most pleased they can deliver their records for their income tax returns much earlier in the year – but we all agree it is much better than a few weeks before the deadline.
In addition to this, without even knowing it they are fully prepared for MTD for Income Tax, as Xero will enable them to file their quarterly returns directly from their software when the legislation comes into force.
There has been an investment made by the couple to purchase accounting software for their separate business streams, both in terms of time and money for the software and training, but they now have a robust system for monitoring the income they make, for keeping their records for their tax return and they are one of our first clients to be MTD for Income Tax ready – nearly 2 years in advance.
