Making Tax Digital for the Self Employed

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HMRC are continuing their digitalisation of the tax system

 What is happening?

Self employed people will be required to keep electronic records of their income and expenses. This information will have to be reported electronically to HMRC every 3 months. An end of year submission will be made to make any adjustments and to correct for any incomplete quarterly information.

This system will replace annual tax returns for many taxpayers.

Is this the same as Making Tax Digital (MTD) for VAT?

This is in addition to MTD for VAT.

This new quarterly reporting system follows similar principles to the MTD for VAT. But this is separate and must be done as well as MTD for VAT. This system is designed to record your profits in real time, whereas the MTD for VAT just reports VATable transactions.

This new system applies to all self employed people, irrespective of whether they are VAT registered, or not.

Who will be affected?

Any Self employed person with income (before expenses) in excess of £10,000 per tax year will need to comply.

The new system also applies to individuals with rental income. Where an individual is both self employed and has rental income then it is their aggregate income from both types together that is considered in determining if the £10,000 limit is exceeded.

When do the new rules come in?

Originally the new quarterly digital reporting was due to start from April 2023, but HMRC have delayed the introduction until April 2024.

Will this change the tax payable date?

At this stage the date for paying the tax will remain as the 31st January following the end of the tax year, and still subject to the payments on account system.

Will I still need to do an annual tax return?

If your only sources of income are earnings, pension, self employed income and rental profits then this system will replace the annual Self Assessment tax return.

There are currently some sources of income that cannot be accommodated into the quarterly reporting such as partnership income and limited company dividends. If you receive those sources then you will have to both comply with the new quarterly reporting and in addition submit an annual return as normal to declare the other sources of income.

Can my accountant handle all of this for me?

Yes, we as your accountants can deal with the quarterly reporting for you. You will need to be able to provide information frequently and timely. It is likely that each quarter will have a window of 30 days to submit the figures.

You may be required to purchase software to handle the electronic record keeping.

Do I need to do anything at this stage?

There is nothing that you can do to prepare for the changes, yet. HMRC have a pilot system with very few participants. The outcome of that will determine the next steps.

Software on the market is still fairly limited but it is expected that as we get nearer to the implementation date the software options will be far greater. It is likely that you will have the choice of using your own software, under supervision by ourselves who can then submit the information for you, or we may have to maintain the electronic records directly for you.

At this stage you just need to be aware that the changes are coming and we will keep you informed of the next steps that must be taken.