Tax Talk: Making Tax Digital for Income Tax Self-Assessment
Making Tax Digital for Income Tax Self-Assessment is coming into play from April 2024. If you are a landlord or sole trader who is going to be affected by Making Tax Digital for Income Tax Self-Assessment (MTD ITSA – which will generally be the case if you have total gross income over £10,000 from these sources), here are a few tips to preparing for when MTD ITSA goes live in April 2024.
Make sure you understand what it is that HMRC will require from you
HMRC has advised that the information that must be provided in each quarterly submission and the End Of Period Statement (EOPS) depends on your business and whether you are a sole trader or a landlord.
For those with annual turnover below the VAT threshold (currently £85,000) you can choose to provide the total of all income and all expenses each quarter instead of the total amount for each category of transaction.
If your annual turnover exceeds the VAT threshold, you will have to provide total amounts each quarter for all the categories (where there are relevant transactions in the quarter). These categories broadly follow those on the Self-Employment or Property pages of the Self-Assessment Tax Return, and include:
Landlords – Total rents, other receipts, rent, rates, insurance and ground rents, property repairs and maintenance, finance costs, legal, management and other professional fees, costs of services provided, other allowable property expenses.
Sole trader – Turnover, other business income, wages/salaries and other staff costs, car/van and travel expenses, repairs and maintenance of property and equipment, phone/fax/stationery and other office costs, advertising and business entertaining costs, interest on bank and other loans, bank/credit card and other financial charges, irrecoverable debts written off, accountancy/legal and other professional fees, depreciation and loss or profit on sale of assets, other business expenses.
As part of the EOPS sole traders will be required to provide capital allowance computations, as well as tax adjustments to their profit or loss, and adjustments to profits chargeable to Class 4 National Insurance Contributions. Landlords will need to include adjustments such as private use restriction, capital allowances, the cost of replacing domestic items, and the rent a room exempt amount.
Full details are in the HMRC notice can be found here.
Find a software provider that meets your needs as a landlord or sole trader
You will need to use MTD-ready software and one that suits your business as you will need to keep digital records if you are not already doing so. There are numerous software providers on the market that will be able to help you prepare for MTD ITSA and help you keep digital records for your trading or rental business.
We are currently meeting with various software providers to understand their software offerings and how these will meet the requirements of MTD, as well as the extent to which they are user friendly, and what additional benefits they may offer, such as the means for landlords to keep all documents for their rental property (i.e., energy certificate, insurance, inventory, gas safety certificate, tenancy agreement) all in one place.
A lot of these products are still in their infancy and may not yet offer the full functionality and the EOPS facility. Some may also be designed for those with simpler tax affairs, and not be able to process more complex aspects. As these software products develop, we will provide further information. In the meantime, if you want to investigate this there is a list on HMRC’s website of MTD compatible software, which can be found here.
Start keeping digital records and get up to date with your bookkeeping now
MTD ITSA requires more administration than the current system for Self-Assessment. Where you would previously collate your income and expense records for the one Self-Assessment tax return submission at the end of January each year, you will now also need to submit information every quarter, and your records must be kept digitally.
To make your life easier for when MTD ITSA goes live, we advise that you move towards digital recording and bookkeeping sooner rather than later so that by the time it becomes mandatory you will already be keeping records of your income and expenses digitally and will therefore find it easier to provide HMRC with the information they require in the format they need it. If you are unsure about what you are doing and what records you should be keeping, start talking to your usual PKF contact now.
HMRC is running a limited pilot, which may be extended in due course, to help test their system before the go live date of April 2024. Registration for the pilot is still open (subject to certain criteria) and will help those who do take part to become familiar with the process before MTD ITSA (and the related penalty regime) come into force.
If you would like advice on any of the issues raised in this article, please contact Sam Meir or Vardeep Kular.