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August 23rd 2021

Making Tax Digital for income tax

Making Tax Digital for VAT has been with us for some time now. The next major step on HMRC's digital tax path will be Making Tax Digital for income tax, which is due to start in April 2023.

Property landlords with gross income in excess of £10,000 per annum, and most unincorporated businesses, will be required to comply. Those businesses who are operating MTD for VAT will already have MTD-compliant accounting software, but the extension of MTD to income tax will bring hundreds of thousands of landlords and smaller businesses into the regime for the first time.

There is a range of MTD-compliant accounting software packages on the market and we are able to advise clients on the most suitable option.

We expect that under MTD for income tax, taxpayers will be required to submit four quarterly "in-year" reports followed by a fifth return which will include appropriate end-of-year adjustments. A property business would make quarterly returns for periods ended 5 July, 5 October, 5 January and 5 April, with the fifth and final submission due by the following 31 January.

Precise details of what will need to be reported to HMRC have still to be confirmed, but it is thought that the categories of income and expenditure are likely to be the same as reported under the existing Self Assessment regime. Accounting software will need to record income and expenditure into the following categories:

  • Turnover (or gross rent)
  • Cost of goods sold
  • Materials
  • Wages/ salaries
  • Sub-contractor costs
  • Rent, rates, power, insurance
  • Repairs and renewals
  • Professional fees
  • Telephone and other office costs
  • Interest costs
  • Motor and travel expenses

It is unclear at the moment how finance costs associated with residential lettings will be dealt with (these costs are no longer deductible but instead attract a basic rate tax deduction).

HMRC argues that MTD will improve the tax take by reducing the frequency and scale of taxpayer errors, but the introduction of MTD for income tax is in our view unwelcome, since it will place a significant additional burden on taxpayers with little or no obvious benefit to the individual. HMRC's claims that a significant increase in the frequency of reporting will somehow reduce the frequency of errors is plainly absurd.

Moreover, the government is simultaneously proposing to change the tax basis year rules with effect from 2023/24, with transitional rules in place for 2022/23, adding further complication and cost to small businesses who after the past eighteen months, frankly, need some help - rather than more red tape.

We can help you prepare for MTD for income tax by sourcing, installing and providing you with training in appropriate, MTD-compliant software. Get in touch today for assistance.

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