Making Tax Digital (MTD) is the latest change to the UK tax system that’s affected VAT registered businesses since April 2019, but it is now due to affect sole traders, self-employed businesses and individuals, and basically anyone who needs to file a self-assessment tax return (and has a gross income over £10,000 per year) from the 6th April, 2024.
So, what is Making Tax Digital for Income Tax (MTD for ITSA), and how will Making Tax Digital impact accountants moving forwards?
A brief history of Making Tax Digital
For VAT registered businesses, MTD is nothing new. Since 2019, they have had to keep digital records and digital tax accounts to submit VAT returns to HMRC using MTD compliant software.
Moving forward, these rules will apply to sole traders and self-employed individuals as they file their self-assessment tax return. So, whilst MTD for VAT is nothing new for some businesses, other small businesses and self-employed people will now need to get used to storing their business records digitally so HMRC can get the information they need.
Again, you will need to use MTD compliant software, which will then be sent to HMRC when you file your self-assessment return using your government gateway user id, which will then allow HMRC to determine how much tax you owe for that tax year.
How MTD for income tax will work
MTD for income tax will work much like Making Tax Digital for VAT works now. You’ll find MTD compatible software to store all your information. Things like:
- Business income
- Tax payments already made
- VAT information (if any)
Basically, if HM Revenue and Customs requires you to save the information now for your income tax self-assessment tax return, then you’ll still need to save it – but digitally.
The new schedule
In addition to MTD for income tax (or MTD for ITSA) being new, the new rules also bring a new schedule. Instead of one reporting period, small business owners and self-employed individuals will now need to provide quarterly updates to HMRC, with a final declaration at the end of the year.
This will allow those in self employment to stay up to date with their tax position and prepare them for tax returns and any tax payments they may owe for the tax year ahead of time.
Altogether, though, this means 5 tax returns per tax year:
- The first covers the period from 6th April – 5th July (and is due by 5th August)
- The second covers the period from 6th July – 5th October (and is due by 5th November)
- The third covers the period from 6th October – 5th January (and is due by 5th February)
- The fourth covers the period from 6th January – 5th April (and is due by 5th May)
- And the final declaration or end of period return is due by 31st January following the relevant tax year as usual
But what do these accounting periods mean for accountancy practices, and how accountants will work with most clients?
How MTD will affect accountants
Well, because everything is moving online to digital records and online banking, accountants may need to change the way they work.
So long as sole traders and self-employed individuals have internet access, accounting software, and understand the new MTD rules, then many will be able to store information much easier thanks to real time recording.
That means, for the accounting period, clients and businesses may have less of a need for an accountant. But there are still ways accountants can help when MTD for ITSA comes into full force in April 2024.
Your average small businesses, self employed individuals, unincorporated businesses, and landlords aren’t going to read up on the results of the MTD pilot, get to grips with MTD for VAT or MTD for income tax, or read the new rule changes and schedule. But you will.
You’ll understand things like:
- Paying tax on property income for UK property (including furnished holiday lettings)
- Capital gains tax
- Tax liability
- Corporation tax
- The VAT threshold
- And how clients who don’t want to use MTD compliant software will still need to use bridging software to comply with the MTD rules
The point is, just because the government are Making Tax Digital, doesn’t mean every business will suddenly stop requiring your assistance in filing their returns.
In fact, because there are so many more things to do in each accounting period, a business might need your help more than ever.
How MTD might actually benefit accountants
With thanks to Auditox Accountancy here are just some of the ways MTD can actually benefit accountants:
When helping a client or a business file their income tax self assessment, MTD for ITSA actually makes things easier for you. As their accountant, you’ll be able to use their financial data and information in a much more manageable way, because you’ll be helping them file quarterly in each accounting period. That makes the income tax self assessment much easier to deal with because you don’t need a year’s worth of financial information at a time.
You’ll also be able to advise your clients about more topics. For example, your clients may not know which MTD compatible software will work best for their trading style, but you’ll be able to explore options with them and advise them about which is best in terms of the new Making Tax Digital rules, but also which is best for them as they file their tax return.
Of course, all of these changes have some drawbacks. You’ll need to get used to the cloud software that’s compatible with MTD for ITSA (and MTD for VAT) when filing a tax return on behalf of a business, and that can mean extra training.
There’s also an increased workload when MTD for ITSA comes into full force, and you will have to keep on top of that for the businesses and clients you’re working with.
Yes, going digital for income tax has some drawbacks, but it’s also set to be a much more streamlined process. There will be changes in the way an accountant works and approaches their tasks with each business and client, but MTD is on its way.
So, get to grips with MTD now, understand the software that will be used, and as an accountant, you’ll still be an invaluable asset to any business or client you work with!