Getting your Digital House in order – the latest on Making Tax Digital

The transition to Making Tax Digital (MTD) was originally announced back at the 2015 Budget.  MTD, as originally envisaged, was to transform tax administration so that by 2020 income tax, VAT and corporation tax would all require digital record keeping with quarterly updates being submitted online.

Since then, MTD has been repeatedly pushed back, and currently the digital record keeping requirements only apply in respect of VAT, and then only for businesses subject to compulsory registration.  MTD for corporation tax will now not happen before 2026, and in September, the Government announced a further postponement of MTD for income tax.

But what do you need to be aware of over the next few years?

VAT

From April 2022, any voluntarily VAT registered businesses who have not already chosen to come within MTD, must comply with the requirements, keeping digital records and filing via the software.  These smaller businesses may need to adopt new software.

Income Tax

MTD for income tax has been postponed until April 2024, with general partnerships coming into scope from April 2025.  Partnerships with a corporate member and LLPs will be later, but we don’t know when.

This seems a long way off, but just over two years may not actually be long given the changes which are afoot.

MTD for income tax will apply to individuals and partnerships who have self-employment and/or gross rental income in excess of £10,000 per year.  These taxpayers will be required to keep digital records, and to file quarterly submissions to HMRC from their software, along with an end of period statement.

For established trading businesses the digital record keeping requirement may not be that onerous, as they may already be using compatible software.  However, many smaller businesses and many landlords do not, in my experience, keep records so regularly up-to-date, and the move to using software and making regular filings could be a big upheaval.

Basis Period Reform

Alongside MTD, the Government has been consulting on reform of “basis periods” for taxing sole traders and partnerships from April 2024.

We currently use a “current year basis”, which means businesses will be taxed based on their accounting period which ends in the personal tax year (which runs to 5 April each year), with special rules for years of commencement and cessation.  This often means that a business is being taxed on very historic profits.

For example, a business with a 30 April 2020 year end would have those profits taxed in the year to 5 April 2021, with the balancing payment of tax due on 31 January 2022. The new proposal will introduce a “tax year basis”.  This will mean taxing profits that arise in the tax year itself.  This is simple for businesses using a 31 March or 5 April year end, but for those that do not, it will either mean changing year end, or apportioning profits from two different accounting periods, perhaps with the need to use provisional figures and amend them later.

For businesses whose year ends do not currently coincide with the tax year, the move to the new rules will accelerate when tax is paid, creating a cash flow implication.  To assist with this the Government proposes an election to allow any excess profits arising in the year of transition to be spread over a period of up to 5 years.

As ever, preparation for the changes will be key.  Those smaller businesses about to come within MTD for VAT for the first time must make a plan for compliance now.  On the longer term changes we await further developments, but businesses may want to start factoring in MTD and basis period reform to their business decisions.  As ever, the Ensors team are on hand to assist.