HMRC has been working hard on its Making Tax Digital initiative since 2019. Income Tax is the next phase and today we want to share with you the 15 important things you will need to know about Making Tax Digital and Income Tax.
Why is HMRC creating the Making Tax Digital system?
Simply put the Government would like to make their taxation system not only easier to use for business owners and citizens but fully digitalising the processes for reporting means HMRC can tackle taxation cash flow and even levy penalties more easily.
Whilst any change in reporting can feel like a huge undertaking for busy business owners, it does offer us an opportunity to understand and plan for our taxation much more effectively. In this article, we hope to make those opportunities more clear.
What do you need to know about Making Tax Digital and Income Tax?
1. When does Making Tax Digital come into force? Making Tax Digital will come into force for self-employed businesses and landlords with annual business or property income above £10,000 (this does not include limited companies yet). They will need to follow the rules for Making Tax Digital for Income Tax from 6 April 2024. This includes landlords, freelancers, contractors and agency workers. This also includes those who gain income from more than one source.
Those with joint incomes who report separately will also need to abide by this new ruling and if your share of income reaches £10,000 you will qualify for Making Tax Digital for Income Tax.
Those who are resident or domiciled in the UK and have UK, or foreign earnings are also eligible for this new rule. So if you live in the UK and rent out a property in France, then your combined income will be eligible if you hit £10,000 before expenses.
2. When is the deadline for registration? 6 April 2024.
3. What will you need to do for HMRC reporting under this new rule? You will need to use HMRC approved compatible software to produce digital records of your business income and expenses. We recommend Xero, because it is a reliable and robust accounting system that will give you the real-time data to make the right planning decisions for taxation and growth.
Whether you choose Xero or not, we recommend you use a system that will digitally remit your reporting for you as they have started to do with Making Tax Digital for VAT. This will mean your in-house and HMRC remittance process becomes quicker and easier.
After you have remitted your records you will need to submit a finalised declaration via your digital software to HMRC and then make your tax payments via your HMRC portal (Government Gateway).
4. How often will you need to remit your records (returns) to HMRC? This will be the biggest change for smaller businesses, as you will need to report once a quarter, instead of once a year.
Your software will provide you with a quarterly income and expense report which you will be able to either remit directly to HMRC through API integrations, or you will have to manually remit these digital reports to your tax account.
5. What are the tax return dates each year? These are the same as VAT reporting dates.
Q1 is 6 April - 5 July and the deadline for remission is 5th August
Q2 is 6 July - 5 October and the deadline for remission is 5th November
Q3 is 6 October - 5 January and the deadline for remission is 5th February
Q4 is 6 January - 5 April and the deadline for remission is 5th May
We can make an election to change these dates if necessary.
6. When do I need to actually pay the tax by? You will have until 31 January the next year to make your completed annual payments from each quarter. However, we recommend that you get into the habit of paying your tax much closer to each reporting submission date. This will aid your cash flow and help you keep on top of your annual business budget.
7. Are there exemptions to this new rule? Yes. If your income is less than £10,000 (before expenses) then you are exempt. If you are a group that falls into the categories of trusts, estates, trustees of registered pension schemes and non-resident companies, then you are also exempt.
8. What if I am in partnership? Rules for Making Tax Digital and Partnerships come into effect from 6th April 2025 and the eligibility requirements remain the same, £10,000 in income.
9. Can I report using spreadsheets? Yes, at this stage HMRC will be accepting spreadsheet reporting. It is important to note that this may not be the case ongoing. We personally advise using professional subscription-based software instead. Not only will this mean easier reporting, but it will also keep you up to date with cash flow, payroll and budgeting as you grow.
10. Is there a pilot scheme I can join? Yes. You can join the scheme which is already in operation here.
11. What are the penalties for late or errors on returns? Currently, penalties are not being given during the first year of the new Making Tax Digital system, as HMRC are still making their updates. However, after this time you can expect penalties for errors in returns or documents and late payment interest. We expect checks for errors and late payments to become much more swift and this is part of the system reform.
If you file late you are likely under the existing rules to pay a penalty of £100 for 3 months after the deadline. After this time interest per day is incurred. If you are in a partnership all partners will be fined if the tax return is late.
12. How can I make my returns error-proof? If you do not have an in-house accountant we recommend sourcing an accountant who can act for you. By having a professional on your team (even if outsourced) you can not only eliminate as many errors as possible from your tax returns, but you will also get some help on understanding what you can and cannot claim for under expenses. You may find that your tax bills actually go down as a result!
If you need some help, please be in touch. Our team is ready to help you roll out your digital tax program.
13. How can I transition from paper to digital records quickly and easily? We recommend Xero which we can either implement directly for you or guide you through the process.
Once you are set up we can help you register with HMRC’s digital portal and show you how to report effectively. Or we can do it for you!
14. What happens if I already use an accountant to submit my tax returns? Your accountant will need to submit digital records and declarations on your behalf using the new digital portal. We recommend that you speak with your accountant to establish if this is possible. If it is unclear, then you may need to source a new accounting team to act on your behalf. If you need some help please contact us.
15. Will my accountant need extra information from me in order to complete more regular returns? No, but they will need your income and expense reports more regularly and most likely in digital format. We recommend getting into the habit of monthly submissions to avoid a last-minute rush at tax deadline time and possible penalties. If you are using digital software, then this is much easier to manage.
Final Thoughts on Making Tax Digital for Income Tax
Taxation change is inevitable and so planning for Making Tax Digital for Income Tax is a crucial part of your business progression in 2022. It doesn’t have to be a headache though. In fact, change like this can become a great opportunity.
Ask yourself, if you could produce a digital real-time cash flow for your business, would you find that you have the funds to pay yourself more, or invest in the next step of your business growth? We have found that 100% of our self employed clients make great things happen when they understand what their cash is doing daily. They can invest in new staff, or freelancers when they need them, they can invest in new product or service offers and they can invest in themselves because they can see where they have the cash freedom to do so.