Sole traders and many landlords will need to move to quarterly digital reporting from April 2024. Find out how to prepare yourself for Making Tax Digital (MTD).
If you are a business registered for VAT, you should already be familiar with the concept of MTD for VAT. If not, do contact our VAT team for advice on what you need to do to be compliant.
It has long been the Government’s intention to extend Making Tax Digital (MTD) to landlords and unincorporated businesses (sole traders) for the reporting of income and expenses. The pandemic further delayed its introduction, but there is still a firm commitment to move taxpayers to quarterly digital reporting of rental and business income.
Self-employed businesses and landlords with annual business turnover or gross rents above £10,000 will need to comply with the rules for MTD for Income Tax (MTD for ITSA) from 6 April 2024. There will also be a new late filing penalty regime introduced alongside this.
What does MTD mean for you?
Put simply, MTD for ITSA will require the sole trader or landlord with gross income over £10,000 per year to keep digital records of that income and expenses and submit these to HMRC quarterly.
You will then submit an end of year statement with the final business income or rental at the end of the tax year. This statement must include any accounting adjustments required, along with tax reliefs and other adjustments, and a confirmation that the information is complete and correct.
As a sole trader or landlord within MTD for ITSA you should not need to file a Self Assessment Tax Return. Instead, you’ll complete a final declaration, which will confirm any personal income, and submit claims for reliefs.
You’ll need specific software to keep these digital records and prepare your submissions. HMRC won’t provide it, but has a list of software providers that meet their requirements. This list will be reviewed and updated as more providers come on aboard ahead of the proposed April 2024 date.
What isn’t yet certain is how well HMRC’s system, and which providers, will be able to cope with the final annual declaration for taxpayers who have more complex tax affairs and multiple other sources of income or international aspects.
But April 2024 is nearly two years away, so why should you worry about this now?
New rules for basis periods
As part of the move to MTD for ITSA, the Government intends to reform the rules on basis periods for sole traders. This will align sole trader business reporting to the 5 April tax year. If you currently report your sole trader business income and expenses to a year end other than 5 April (or 31 March), you’ll need to transition to a 5 April year end from 2024/25. The transition year is 2023/24.
with further details and opportunities for planning in advance of the changes.
Landlord threshold tactics
If you’re a landlord whose gross rents are just below the £10,000 threshold, you may wish to review any rental increase above the threshold carefully, the additional costs of complying with MTD for ITSA may outweigh the increased rent. The £10,000 threshold is per landlord, not per property, so it may be worth considering transferring properties into joint names if you are married or in a civil partnership, to split the rents across two landlords.
Get your ducks in a row
Good habits take a while to establish and time moves fast. So it’s wise to start thinking now about what records you have for your business or rental, and what you might need to do or change in order to be ready for your first MTD return in summer 2024. HMRC is also launching pilots for taxpayers to help you get used to the system and test it.
New software advantages
Some of the software on the market can bring other benefits. Some enable landlords to easily keep track of their lettings, overdue rents and current property values. Some also keep soft copy documents such as tenancy agreements, gas safety certificates and insurance all in one place.
Find out more
Our team is monitoring both HMRC’s progress and that of software providers in rolling out MTD for ITSA. We’ll be including regular updates in our Tax Talk newsletter and on our website, to help guide you towards the changes.