Making Tax Digital (MTD) income tax is the biggest shakeup of the UK personal tax system in years. Reporting will change from one tax return per year to five separate reporting requirements and a final declaration every year and will require a lot more data to be sent to HMRC.
The good news is if you earn less than £10,000 per year from qualifying business activity (sole trader) and property income you can relax as you are not required to report this income via MTD for Income Tax.
If you earn more, you will want to read on!
Current Reporting Requirements
Currently, the only tax reporting required for sole traders and landlords (provided that you do not have VAT obligations) is submitting your self-assessment tax return by the end of January of the following tax year (e.g. for the 2020-21 tax year which runs from 6 April 2020 – 5 April 2021, you would need to submit your tax return by 31 January 2022).
New MTD for Income Tax Reporting Requirements
Quarterly Updates
Under the new MTD for Income Tax rules, HMRC requires you to send updates for each business/property that you own via approved software.
HMRC will then show you a more accurate quarterly estimate of tax that you owe by the end of the tax year.
HMRC is aware that you may have final year adjustments or reliefs, so it is not an expectation, nor a legal requirement for your quarterly return to be completely accurate.
End of Period Statement (EOPS)
At the end of each accounting period, you will need to submit an EOPS to HMRC for each business or property that you own. Therefore, if you have three sole trader businesses and one property, four statements would be required.
If there are any reliefs or complex tax calculations such as R&D or leases, this would be a good time for your accountant or tax advisor to come in and make sure the figures are correct, and your reliefs are maximised.
Final Declaration
You might think that your MTD for Income Tax requirements have finished now that you have sent in your EOPS, however, HMRC requires one further confirmation of income called a “Final Declaration”.
At the end of the period, you will need to “crystallise” your income tax.
This essentially means that you will need to use software to view your final income tax estimate calculated by HMRC based on all the inputs that you have included in the year.
At this point, your accountant may decide to make corrections or adjustments and you will then need to legally declare via a final declaration that you’ve provided all the information HMRC requires, and you agree with the final calculation and tax figure.
This final declaration applies to the individual, not to the business so if you have three businesses and one property you would still only be filing one final declaration per year.
When will MTD for income tax come into effect?
MTD is a long-term project for HMRC and already started for VAT in 2019 and culminating with Corporation Tax scheduled to be introduced in 2026. MTD for income tax is the second step of HMRC’s three-step process scheduled to take effect from 6 April 2024.
This may feel like a long time away; however, it is best to prepare yourself for this future change. This may include moving away from a spreadsheet-based reporting approach to using full-fledged online software that will encapsulate MTD for income tax when the time comes.
As with MTD for VAT, there are likely to still be a way to submit if you do not use online bookkeeping software. These bridging software applications are not a perfect approach and are usually reserved for accountancy firms that may have many clients that do not use online bookkeeping software. As we move closer to 2024, you may want to speak with your accountant to confirm what your future requirements might be.
Are you an affected sole trader or landlord?
Any UK sole trader with combined business and property income above £10,000 will need to start submitting quarterly MTD updates.
If your business and property income is below £10,000 then you will probably see no change. Income from other sources such as employment, state benefits, interest or pension income is not included in the qualifying calculation.
Can a sole trader opt-out of MTD for Income Tax?
There are a few situations where you can opt-out of MTD for income tax but note these are seen by HMRC as exceptional circumstances and are only meant to affect a very small number of individuals, where submitting digitally would be impossible or impractical.
A few examples where you could submit a paper return instead are:
- You live in a remote location
- Due to disability, it is impossible or very difficult to use a computer
- Religious prohibition
If you feel that you have an excuse to opt-out of MTD for Income Tax, you will need to apply to HMRC directly explaining your reasoning.
What are the MTD for Income Tax deadlines that I should know about?
Quarterly updates- You will need to submit quarterly updates to HMRC, depending on your accounting period.
EOPS- You will need to submit the EOPS by 31 January of the following tax year.
Final declaration- Like EOPS, you will need to submit your final declaration by 31 January of the following tax year.
If I have already signed up for MTD for VAT, do I also need to sign up for MTD for Income Tax?
In short, yes.
The two schemes are independent of one another, and you must therefore register separately for MTD for Income Tax.
As a time and money-saving measure, it is recommended to align your VAT reporting quarters to the MTD for Income Tax quarters.
Can my accountant sign me up for MTD for Income Tax?
Absolutely. You will need to contact them in advance so that they can make this change with plenty of time as you can imagine you will not be the only client with this request.
As an accountant, they can submit quarterly updates, EOPS and final declarations on your behalf.
Can a sole trader deregister for Income Tax for MTD?
It is not yet known whether sole traders can remove themselves from Income Tax for MTD once they record income under £10,000.
Likewise, it is still unknown whether those with income under £10,000 will be able to voluntarily register.
It is expected that this information will become available once HMRC comes to a resolution on the matter.
