With just over 18 months to go until Making Tax Digital (MTD) for Income Tax is rolled out in the UK, one in five UK sole traders are claiming to have never heard of the initiative, despite it being announced by the government in 2015. This figure is worrying as MTD for Income Tax will see quarterly reporting requirements become mandatory from April 2024.
What is MTD for Income Tax?
The new changes mean that sole traders and landlords with more than £10,000 in annual turnover will need to start reporting their earnings using MTD compatible software. General partnerships with over £10,000 of annual turnover will have to follow the same rules from 2025. This change in rules will impact the majority of buy-to-let landlords.
Once MTD for Income Tax takes effect, those impacted will have to keep digital records. These will have to be filed to HMRC every quarter, using third-party software, replacing the traditional annual tax return.
Users of the new system will have to choose from a government-approved list of software providers. Some offer a free service, but tax specialists have warned these will likely only be suitable for those who have very basic tax affairs. Therefore, it is likely many people will have to pay for the use of their choice of software.
It has been found that the majority of these sole traders do not have an accountant so there are fears that the levels of compliance to the new rules will be low. The survey by software provider Coconut found that only 14% currently use an accountant or bookkeeper for their self-assessment tax returns, while just 7% use one for all financial administration.
As well as poor levels of awareness, over half of the sole traders surveyed said they were either underprepared or not prepared at all for the changes, with nearly a third admitting they delay doing their taxes for as long as possible as they find it anxiety-inducing.
Even further in the future, HMRC have confirmed that MTD for Corporation Tax will come into force no earlier than 2026.
This will come as a relief to company directors and accountants alike as the advent of MTD for Corporation Tax will no doubt be a great upheaval for both, and so the four years left to prepare will be key to ensuring all those concerned are adequately equipped.
HMRC are planning to bring in a pilot scheme that will allow companies to trial filing their Corporation Tax returns in line with the Making Tax Digital rules in April 2024. This should give the companies who choose to participate in the scheme a head-start in testing the impact the changes will have on the way they deal with their company tax.
As outlined, the next step for Making Tax Digital is in the introduction of MTD for Income Tax.
While it might seem far away at this stage, time has a way of creeping up on us and it is important to be aware of this date, and to ensure you are ready if the change in rules applies to you.
However, you should not be daunted by this deadline as the automation involved in cloud software, which is the cornerstone of Making Tax Digital, means that most of the work should be done for you.
As always, if you would like any further information regarding any of the current or upcoming stages of the Making Tax Digital scheme, please feel free to contact our offices by email firstname.lastname@example.org.