MTD for income tax: Preparing for the upcoming changes

Apr 4, 2022 | Uncategorized

Sometimes gradual changes are the easiest to miss.

The Government’s Making Tax Digital (MTD) scheme began its mandatory rollout in 2019, with the aim of completely digitising the UK’s tax regime. But with the disruption of the pandemic, you’d be forgiven for losing track of where we are.

In this blog, we’ll explain the current rules, the new changes and what to expect in the next few years.

What are the current MTD rules?

The first stage of the MTD rollout was introduced in April 2019, requiring VAT-registered businesses with an annual income of £85,000 or more to keep digital records and submit their VAT returns using MTD-compatible software.

From April 2022, MTD for VAT was extended to all VAT-registered businesses, regardless of income.

This means that all such businesses are required to keep digital records and submit regular digital VAT returns, even if their annual turnover is less than £85,000.

What do the next few years have in store?

If you are self-employed or a landlord with an annual turnover of at least £10,000, the date for your diary is April 2024.

Your first self-assessment filed after this date must be digital under MTD for income tax self-assessment (ITSA) rules. As well as an annual report, you will be required to submit a quarterly report of income and expenditure.

This change was originally planned for April 2023, but was delayed by a year because of continued business disruption caused by the pandemic.

MTD for ITSA will apply to unincorporated partnerships with an income of £10,000 or more from April 2025.

MTD for corporation tax will be introduced no earlier than April 2026.

Am I exempt from MTD?

MTD for ITSA will apply to most businesses and landlords. However, you may be eligible for an exemption if filing a digital return is not a practical option.

This could be due to age, location, disability or a religious belief that prevents you from keeping electronic records. In order to obtain an exemption, you need to contact HMRC directly.

Can I register early?

Although the deadline has been extended, there’s no reason you can’t register for the MTD for ITSA pilot scheme rightnow. In fact, there are a number of advantages to signing up sooner rather than later:

  • submitting your tax return digitally reduces the chance of errors
  • an online self-assessment is much quicker, and your details will be saved for future tax returns
  • registering early gives you more time to find MTD-compatible software and get used to using it.

You can sign up for the pilot scheme through your MTD software provider.

What are the penalties for non-compliance?

HMRC is introducing a new penalty system for late submissions and late payments, which will apply to all MTD for VAT submissions from 1 January 2023 and to all MTD for ITSA from April 2024.

The new system is designed to be fairer and less punitive. It assigns points for each submission obligation, and applies an automatic penalty of £200 if a certain threshold is passed. A full explanation can be found here.

MTD will make life a lot easier in the long run, but it may take some getting used to. The extended deadline is a great opportunity to prepare, so don’t be afraid to make the most of it.

If you’re unsure about any aspect of MTD, from choosing accounting software to filing your first digital tax return, get in touch.

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