The UK Government has extended its Making Tax Digital (MTD) programme for the UK’s smallest companies to April 2022.
The announcement confirms that all VAT registered businesses will have to comply with MTD from 1 April 2022 whilst MTD for income tax has been delayed until 6 April 2023.
The current rules
Since 1 April 2019, the vast majority of VATregistered businesses with a taxable turnover above the VAT threshold (£85,000) have been mandated to keep digital VAT records and send returns using MTD compatible software.
Changes for VAT registered businesses - from 1 April 2022
From 1 April 2022, all VAT-registered businesses with a taxable turnover below £85,000 will be required to follow MTD rules for their first return starting on or after April 2022. This will be regardless of their turnover.
Changes for Income Tax – from 6 April 2023
MTD for Income Tax Self-Assessment (ITSA) will apply from April 2023 for unincorporated businesses and landlords with total business or property income above £10,000 per year.
Businesses and landlords who join MTD for income tax will need to send a quarterly summary of their income and expenses to HMRC using MTD-compatible software. They will receive an estimated tax calculation to help them budget for their tax payments. The estimate will be based on the information entered and won’t account for any tax-relievable payments such as gift aid or pension contributions, or any tax due on other income (for example investment income and capital gains). At the end of the year, they can add any non-business information and finalise their tax affairs using MTD-compatible software.
The benefits of a digitalised tax system
HM Revenue & Customs have been piloting MTD ITSA since April 2017 and their feedback on this has been that those who have volunteered are benefitting from a more streamlined digital experience.
Given the challenging year businesses and individuals have faced this is perhaps welcome news, allowing more time to prepare. However, with working more remotely during the Pandemic many businesses have accelerated the use of technology and perhaps for them MTD may now feel less of a challenge and more of a natural progression, in addition to the digitalisation they have already embraced over recent months.
For the large number of people who are self-employed and below the VAT threshold who still need to look at how they are going to prepare for MTD, they would benefit from adopting technology now and getting used to it, rather than delaying this until closer to 2023.
For those getting to grips with the new normal many may also be looking to set up as self-employed or starting a property portfolio in light of the SDLT Holiday and therefore these individuals would be best to start from the outset with systems that will equip them for MTD.
As outlined in HMRC’s response to the MTD pilots, businesses already using MTD have benefited from this. With more efficient systems, their teams have been able to be more productive and spend more time on areas such as ensuring they are fully compliant and not at risk of HMRC investigations and importantly ensuring all tax reliefs and allowances are claimed. In addition, greater visibility on financial reporting and forecasting tax estimates, which in the current times having this real time information on cashflow, is key.