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Following in the footsteps of MTD for VAT, the next step of HMRC’s tax digitalisation plan now has a date with the announcement of the full mandating of MTD for Income Tax to thousands of taxpayers.

Self-employed businesses and landlords with annual business or property income above £10,000 will need to follow the rules for MTD for Income Tax from their next accounting period starting on or after 6 April 2023.

A pilot scheme for the system has been in place for some years but with restrictions on who could join. Currently, both sole traders with income from one business and landlords who rent out UK property (excluding furnished holiday lettings) can sign up, however, they will require compatible software to make the correct submissions to HMRC

What does MTD for Income Tax Involve?

Under MTD for Income Tax proposals, the annual Self Assessment tax return will be replaced by five new reporting obligations made during and after the tax year that must be completed using approved compatible software.

All business income and expenditure must be recorded digitally within compatible software, after which the data is collated and a submission sent to HMRC. Transactions will need to be recorded individually rather than grouped together (‘monthly totals’, for example).

The first four submission periods are based on your accounting period, split into quarters. For example, if you have a 31 March or 5 April year end, your first return of the accounting period will be for the quarter ended 30 June or 5 July, respectively and then every three months thereafter.

A final fifth submission is made at the end of the accounting period to finalise business income and expenses. Any updates and corrections are included in this submission, along with any accounting adjustments. This final submission replaces the normal Self Assessment tax return, however the 31 January filing and tax payment deadline will still apply as it does now.

Digital Exclusion Opt-Out

Throughout the MTD rollout HMRC have provided scope for opt-out in only a very limited number of circumstances. You could be excluded from the electronic bookkeeping and filing elements of MTD if you are unable to complete it due to age, disability or location or if it is contrary to your religion. However, HMRC will need to agree to any exemption before it applies and it is expected that not many will be covered by this exemption.

Accounting Software

Every business and landlord will have their own preference as to what software they wish to employ and indeed many from the MTD for VAT rollout made the decision to simply delegate both or either of their bookkeeping and online filing to Thomas Westcott and again this could be an option for you.

If you prefer to look after your own records you will need to think about what suits you best, with options ranging from cloud accounting software accessed through a computer, tablet or phone to a standard spreadsheet which uses a piece of ‘bridging software’ to make it compatible for filing.

Whilst accounting software will likely involve an additional cost, many clients have been able to save significant time compared to the manual processes they currently undertake by utilising the digital tools available. Thomas Westcott has significant experience in advising and implementing accounting systems for clients and can help you decide which option may be best for you.

Other Matters

With the use of accounting software likely to become more prevalent, small businesses and landlords may want to review their banking arrangements to ensure personal accounts are not used to make the bookkeeping process easier.

Additionally, businesses may wish to carefully review their accounting periods to confirm its suitability for when MTD becomes mandated.

HMRC have also confirmed that whilst tax payments will continue for now as is currently the case, a further option will be available to voluntarily pay taxes on a ‘pay as you go’ basis.

The details of the MTD for Income Tax roll-out are still being finalised and Thomas Westcott will continue to provide updates on a regular basis. For further advice on this matter, please do not hesitate to contact me or your local Thomas Westcott office.