Making Tax Digital For Income Tax
We now have confirmation that HMRC will roll out Making Tax Digital for Income Tax from April 2023. That may seem a long time away, but we all know how quickly time can pass. It is therefore important to understand what it means and how you need to prepare for it. It will affect all sole traders and partnerships with a turnover exceeding £10,000 and landlords with gross rents exceeding £10,000.
If you are a VAT registered business with sales of more than £85,000 a year, then you are probably submitting your VAT returns using MTD for VAT. The transition has hopefully gone smoothly, and you may be wondering what the fuss is about.
VAT accounting is relatively straight forward, you either use the cash basis or the invoice basis. VAT is payable or repayable based on the date of the invoice or on the date of payment. Income Tax is calculated in a very different manner. Sometimes, in small or straight forward businesses, a cash basis is used, but the majority of businesses will prepare accounts using the ‘accruals’ basis. This involves many accounting adjustments for things like depreciation, deferred income, stock, which are normally done once a year when completing the end of year accounts and tax return. There are also adjustments to make for tax purposes only, such as capital allowances.
MTD for Income Tax will require a quarterly digital submission of summary figures of income and expenditure. This will be followed by a year end declaration. The figures will be used by HMRC to provide ‘in year’ estimates of your tax liability. The easiest way to do the submission will most likely be to use compatible accounting software. However, you will still need to consider whether to do those accounting and tax adjustments quarterly or leave them to the year ended declaration. If you don’t do them quarterly your tax estimate is not likely to be accurate.
This is likely to be an additional cost for businesses, particularly those that do not currently use accounting software, although spreadsheets will be acceptable if used with appropriate bridging software. For non-VAT registered businesses it is an additional compliance burden and will be more time consuming. There will be penalties for non-compliance.
On the positive side, it will improve your business and cash management and if you involve EQ in the process, we can offer more pro-active tax advice. If you aren’t sure what to do, or don’t want to deal with the hassle, we can help you prepare and take on the compliance burden. Please don’t leave it too late to get in touch.