Big changes are coming for the way in which businesses keep their records and report to HMRC. From April 2022 all VAT-registered businesses will have to keep digital VAT records and send returns using Making Tax Digital (MTD) compatible software. At present only businesses with a taxable turnover above the £85,000 VAT threshold must do this.
The rollout of MTD to income tax, recently delayed until 6 April 2024, will have an even greater impact. Self-employed individuals and landlords with total business and/or property income above £10,000 a year will have to keep MTD-compatible digital records and submit quarterly updates to HMRC.
Individuals will have to send HMRC updates at least quarterly for each business and any rental income, as well as end of period statements (EOPS) for each income source. The EOPSs must be sent by 31 January after the end of the tax year. These will produce an estimate of their tax liability. Also by 31 January each year they must submit a single final declaration covering all their income. This will replace the self-assessment tax return, except for individuals who have to report other income or claim certain deductions.
Sole traders will enter MTD at the start of their first accounting period following 5 April 2024. HMRC will give notice to file under MTD based on figures in the 2022/23 tax return.
The VAT and income tax MTD schemes are separate and traders registered for MTD for VAT will have to register separately for income tax.
It is estimated that 4.3 million self-employed individuals and businesses will have to start reporting under MTD during 2024/25. Recent research revealed that almost one fifth of small business owners use a paper filing system for their finances. Early preparation for the transition will be imperative.
New accounting date proposed
Separately, the government is consulting on a proposal under which – from 2024/25 – a business’s profit or loss for a tax year is the profit or loss arising in the tax year itself, regardless of its accounting date. This would eliminate the need for special calculations at the start and end of a business, which can result in some profits being taxed twice. But the change would also result in earlier payment of tax for many. If this proposal goes ahead, the start date of MTD for all individuals above the turnover threshold will be 6 April 2024.