The concept of Making Tax Digital was announced in the Chancellor’s Autumn Statement of 2015. It is part of a process that has been taking place over a number of years in an attempt to make more use of the digital world in which we live by integrating various taxpayer processes more in line with the systems of HM Revenue & Customs.

Since the announcement there has been much talk within the tax and accountancy profession about how Making Tax Digital will be implemented and how it will work in practice. We have been following these discussions so that we are able to inform you of what it will mean for you.

Moving to a digital age

Under the Government’s Making Tax Digital strategy, most businesses will be required to keep track of their tax affairs digitally and to update HMRC at least quarterly. To comply with your requirements in the new digital age, you will need to keep digital tax records and record and categorise your receipts and expenses. Apps and software will be available for these purposes. It will be essential that you update your records on an on-going basis so that you are able to provide the information to HMRC on time for each quarterly update.

Exemptions

If you are an unincorporated business or landlord with an annual turnover below £10,000 you will be exempt from the digital tax obligations.

Cash basis for larger traders

If your turnover is below the VAT registration threshold (currently £90,000) you can opt to prepare your accounts using the cash basis (money in and out) rather than using the more usual accruals basis. The opportunity to use the cash basis is to be extended to larger unincorporated business as part of the proposals for moving to a digital tax world. You should consult with your accountant if you would like to discuss whether a move to the cash basis is for you.

Cash basis for landlords

The opportunity to use the cash basis is to be extended to some landlords in order to simplify the tax rules under Making Tax Digital. If you are an individual business, or a partnership where all the partners are individuals, you count as an unincorporated property business and you will be able to opt to use the cash basis. Please speak to us to find out what is involved and if this is likely to be for you.

Pay as you go

Once Making Tax Digital is up and running, taxpayers will be able to make voluntary payments on account of their tax liabilities throughout the year. This may help you in managing your cashflow and ensuring that you are able to meet your tax liabilities on time.

Getting ready for Making Tax Digital

It is never too early to start planning for the transition to a digital tax world. It is advisable to find out sooner rather than later what Making Tax Digital will mean for you and what changes you need to make to your existing processes to ensure that you will be able to comply with your digital reporting requirements.

Going forward

Current expected timetable:-

The scheme will apply to self-employed individuals and property landlords.

Phase 1 – from April 2026 – applies to those with an annual income of £50,000 a year or more.
Phase 2 – from April 2027 – applies to those with an annual income between £30,000 and £50,000.
The tax year dates remain unchanged.
MTD for Income Tax also applies to self-employed individuals who must comply with MTD for VAT.

Regardless of which date the taxpayer enters the scheme, the compliance process is as follows:

All income and expense information must be recorded and submitted digitally every quarter using HMRC approved MTD for Income Tax compatible software.
Taxpayers must make any accounting adjustments or allowances to their digital records.
The Final Declaration, which replaces the Self Assessment part of the return, must be filed, and any tax due should be paid by 31 January after the end of the tax year.

No announcements have been made regarding how or when individuals earning less than £30,000 a year or partnerships will be required to join the scheme.

As you can see the changes proposed are wide ranging and that is without considering the detail of how accountants will be able to interact with the processes that the Revenue are determined to put into place. Of course, from the Revenue’s perspective, it appears that the less a tax expert is involved in submissions, the more tax it will be able to collect.

Updates with developments will be available as and when they happen.

For further guidance with help and advice, please contact:-

Fred Hoad of Sallows Associates Ltd, 99 Western Road, Lewes, BN7 1RS.

E: Fred.hoad@sallowsassociates.co.uk

M: 07802 886578

Making Tax Digital for Income Tax