Self-employed? The Making Tax Digital changes you need to know about

With the massive changes the pandemic has wreaked on how we live and work, it’s not surprising many of us have forgotten completely about Making Tax Digital (MTD).

MTD is the government’s initiative to make it easier for individuals and businesses to get their tax administration right and is broken down into a number of distinct roll-out stages:

  • Stage 1: April 2022: MTD for VAT
  • Stage 2: April 2024: MTD for Income Tax Self-Assessment for all self-employed business owners and landlords with annual income over £10,000
  • Stage 3: April 2025: MTD for Income Tax Self-Assessment for general partnerships with an annual turnover of over £10,000
  • Stage 4: At the earliest, April 2026: MTD for Corporation Tax

Just before Christmas it was announced that Stage 2, which affects all self-employed business owners and landlords, is being pushed back to April 2024.

This delay was welcomed by several of the UK’s largest accountancy bodies who had joined forces to write to the government to say:

“It is the view of the professional bodies representing a large proportion of the UK tax profession that these reforms are being implemented too quickly. We are greatly concerned that the current timetable puts the integrity of the tax system at risk.”

But just because MTD for ITSA has been delayed for a year doesn’t mean we should put it at the bottom of our to-do list. In fact, it’s the perfect time to get your affairs in order so that when the new system does come into effect, you’re ready to go.

Today, we’ll take a look at what the new MTD for ITSA rules mean, who it affects and the things you can do now to get ready for its official roll-out.

What changes is MTD for ITSA introducing?

MTD for Income Tax Self-Assessment (MTD for ITSA) will replace the current system of annual Self-Assessment tax returns.

Basically, this means, if you are a self-employed business owner and landlord, rather than submitting a Self-Assessment tax return to HMRC just once a year, you will need to submit four quarterly updates about your business income and expenses.

Who is affected by MTD for ITSA?

From 6th April 2024, self-employed business owners and landlords with a total business and/or property income above £10,000 per year, will need to follow the new MTD for ITSA rules.

Bear in mind, that ‘self-employed business owner’ refers to someone who is a sole trader, not people who work through a limited company.

For general partnerships with income above £10,000, MTD for ITSA will start in April 2025 with LLPs following at a later date.

What will you need to do under MTD for ITSA?

From 6th April 2024 you will need to:

  1. Keep digital records of your business income and expenses
    This should include all business income and expenses, as well as any income from self-employment or property. If you already use accounting software such as FreeAgent or Xero, this is ideal, as you will be able to pull your bank transactions directly into the software and manage all your expenses and invoicing from one place. We recommend you start keeping digital records as soon as possible. If you need any advice on what software to use or how to set it up correctly, just let us know and we’ll be happy to help.
  2. Send quarterly updates to HMRC

Using MTD-compatible software, you will need to send a summary of your business income and expenses every three months to HMRC.

The submission deadlines will be the same for everyone, so from the start of the tax year on 6th April 2024 these will be:

5th August

5th November

5th February

5th May

  1. Finalise your business income

At the end of the tax year, you’ll need to finalise your business income by submitting an end of period statement (EOPS) for each source of income along with a final declaration. You will need to submit this and pay any tax you owe by 31st January of the following year.

The EOPS also gives you opportunity to confirm all the updates you’ve sent are correct and to make any necessary adjustments, such as details about personal income or reliefs.

What do you need to do next?

  1. Find out if you are eligible for MTD for ITSA by referring to this advice from HMRC or by giving us a call.
  2. Check when you should sign up for MTD for ITSA. A pilot scheme has been running since 2018, which allows certain eligible businesses to sign up and start following the rules. This pilot is gradually being expanded over the next 2 years.
  3. If you don’t already have compatible software have a look at this list and choose a solution that will work for you. We are more than happy to advise you on the best option.

We are also running our own pilot scheme of MTD for ITSA, so if you are interested in taking part please get in touch for more information.

It’s not too early to start preparing

Whilst April 2024 may seem a long way away, time has a nasty way of sneaking up on you, especially if you are running your own business, so we would strongly suggest that you start keeping digital records as soon as possible.

If you do want any more information on MTD for ITSA, please get in touch. We have also produced this handy guide to the new rules for you to download.

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Breaking even – checking the numbers

In previous newsfeeds we have described how you can calculate the level of turnover you need to create in order to meet all your costs whether they be fixed costs (rent, rates etc.,) or variable costs (goods you need to buy to convert into goods you sell).

For example, if your fixed costs are £50,000 per annum and your variable costs are 25% of your turnover, the annual turnover you need to breakeven will be £200,000. The formula is:

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a first payment of £3,500;

Tax codes for employees

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In these circumstances, HMRC can take the view that unless the landlord charges a full market rent for a property and imposes normal market lease conditions, it is unlikely that the expenses of the property are

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