MTD for Income Tax Self Assessment - what it means for your business

In this article, Benjamin Dyer, CEO of Powered Now, looks at what is coming next from HMRC and the impact of Making Tax Digital for Income Tax Self Assessment (also known as MTD for ITSA) on trade businesses.

What is Making Tax Digital (MTD)?

Before diving into what will be the next stage of Making Tax Digital (MTD), it’s worth looking at the overall picture of the programme.

MTD is a massive years-long programme to make all things related to tax move into the digital age. This should eventually result in many improvements.

HMRC’s Making Tax Digital promises to transform tax administration to make it easier for taxpayers to get their tax right. 

MTD involves small businesses and self-employed getting their taxes right and keeping on top of their affairs by becoming paperless and digitalising their taxes.

A variety of reasons have been given by HMRC for the MTD project, but my guess is that these include: To collect tax that is currently being dodged; to reduce cost within HMRC; and to make life easier and more efficient for businesses and individual taxpayers.

Will MTD be abandoned?

MTD is now a reality. In April 2019, MTD for VAT was introduced for VAT-registered businesses with taxable turnover above the VAT threshold of £85,000. 

From April 2022, all VAT-registered businesses (including voluntarily VAT registered businesses) will need to comply with HMRC’s Making Tax Digital. This means that they will need to keep digital records and submit digital VAT returns using compatible software. 

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Slowly but surely, computers have become a critical part of every aspect of life. MTD is pushing both businesses and individuals to keep computer records but also to communicate digitally with HMRC. It seems unlikely that it will ever be rolled back. During my lifetime, the march of computers has seemed inevitable and all businesses becoming computerised doesn’t look like an exception.

So, the chances of MTD being abandoned are extremely slim.

What is MTD ITSA (Income tax self assessment)?

MTD for income tax self assessment, also known as Making Tax Digital for ITSA, will require all self-employed people and landlords with sales of more than £50,000 per annum in the first year and over £30,000 in the second year. That is businesses that aren't a limited liability company or equivalent must submit quarterly profit and loss returns electronically.

What do you need to submit for MTD for ITSA?

Businesses who join MTD for Income Tax need to, for each trading or property business they operate, submit a quarterly report to HMRC of income and expenses in defined categories. 

They also have to submit an end of period statement (EOPS) for each of these businesses. The submissions must be based on electronic records using MTD-compatible software (don’t worry, the Powered Now MTD for ITSA solution is coming soon!).

HMRC will respond by providing an estimate of their year to date tax liability and the estimated tax liability can be viewed at any time. At the end of the year, after all of the quarterly returns, the EOPS adjusts the figures as necessary, then there is “finalisation”, replacing the old Self Assessment tax return.

This means that any sole trader making a living from their business will fall under the new rules. It embraces every little cottage industry. While MTD for VAT hit over a million businesses, MTD for ITSA will impact several million.

It is likely to lead to an explosion in the use of computers and the need for a vast amount of support. After all, VAT registered businesses with minimum sales over £85k can afford an accountant. Most of these smaller businesses impacted by MTD for ITSA can’t.

How do I sign up for MTD for ITSA?

You need to use your cloud-based software (MTD compatible software approved by HMRC) to sign up for MTD for ITSA. If you have any questions you can visit the HMRC's guidance on signing up. You can also ask your MTD software provider or accountant.

Wha are MTD for ITSA key dates and how to prepare

Unknown to most, there is already a pilot program of MTD for ITSA even though it won’t become compulsory for sole traders with more than £50,000 sales per annum until April 2026.

At first, MTD for ITSA will run alongside self assessment, but the end goal will be that all areas where money is earned (employment, investment and trusts and so on) will go onto MTD.

What is the impact likely to be?

The impact is likely to be a lot of complaining, followed by the widespread adoption of computer software to help run businesses. Unfortunately, the reality is that getting businesses to adopt new approaches is hard but not impossible.

The problem with MTD for VAT was that only tens of thousands of companies were involved in the pilot and nearly a million had to adopt MTD in a three-month period which was difficult. At the same time, the communication program to tell people about MTD was far too low key.

The way this should have been done was to have an initial pilot, as was done. But then to have heavily communicated compulsory adoption on a rolling basis, for instance by company name in alphabetic order. HMRC could then have controlled the speed of adoption over time.

In comparison with MTD for VAT, GDPR had a huge amount of publicity and a lot of resultant fear. You could say that this was bad, but the good news was that it got taken seriously. In contrast, HMRC has emphasised a light touch to enforcement of MTD which simply encourages procrastination. Since we will all have to comply eventually, it’s less work to do it once and to do it properly.

In summary

Computerising business records and tax returns has got to be good news if we want rising standards of living, which in turn depend on improving business efficiency.

However, there are a number of mountains to climb before everything is fully up and running.  You can rest assured that Powered Now will be here to help you succeed.

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