Making Tax Digital for Self-Employed Businesses and Landlords

Making Tax Digital is part of the government’s plans to make it easier for individuals and businesses to get their tax right and keep on top of their affairs. We think it encourages business owners to take their accounting processes more seriously and use the numbers to improve their business.

Making Tax Digital (MTD) is not a new concept and we have been filing VAT returns for businesses since 2020. But from the tax year starting 6 April 2024, all sole traders/self-employed businesses and landlords whose income or turnover is over £10,000 will need to also use MTD to file their returns.

Some businesses and agents (including Anlo) are already keeping digital records and here is a list of approved software that can be used to file your MTD returns.

We use Xero, Quickbooks, and Freeagent already to keep our monthly accounting clients up to date. We would encourage our clients to also consider using data extraction tools to link/match their receipts and invoices to the bank transaction as well as including expenses paid from their own pockets in their records.

If you are a once-a-year accounting client, then we will have to move you over to an approved accounting software that can file MTD returns.

MTD will end the need to submit annual tax returns altogether at some point. All businesses in existence immediately before 6 April 2024 will have to follow the new legislation, regardless of their accounting period end, when it comes into force.

However, it’ll only apply to those who have income above £10,000 across their businesses or properties. If your income from these sources is £10,000 or below, you have the option to continue using the existing Self-Assessment system.

This threshold applies to gross income or turnover, not profit, and applies to the total gross income if you have more than one trade or property business.

If you own property and rent the property out, ask your property rental company to send you regular rental reports to understand what your property rental income before expenses are.

This is what we know so far about the MTD for Income Tax Self-Assessment requirements, based on the pilot scheme and pending legislation being published by the government:

• Most self-employed sole traders whose business income is above £10,000 will be required to use compatible software for their income tax accounting for the first full accounting period starting on or after 6 April 2024.

• Similarly, if you were to make £5,000 income from your sole trader business and £5,000 from rental income on property you own, you’d need to follow the MTD for Income Tax rules.

• Eligible businesses and landlords will be required by law to keep digital records of all income and expenses using MTD-compatible software.

• Those that aren’t doing this already will need to purchase or acquire a free version of software in order to comply and this will need to be implemented from the 6th of April 2023.

• For each of your businesses, you’ll need to submit updates at least quarterly (or more frequently if desired), and an end of period statement (EOPS).

• The monthly and/or quarterly submissions won’t include a declaration from you and so there shouldn’t be any penalties for inaccuracy.

• But this will only be based on the information you provide, so won’t take into account any adjustments that you make at the year-end for assets or reliefs. This will be done in your EOPS return

• By 31 January each year, you’ll need to submit a single final declaration for all income. This is very similar to your self-assessment, except we suspect it will be a different form.

• Notably, the EOPS applies to each business you run, rather than the individual, so you may find yourself submitting several.

• This final declaration brings together all information on your sole trader businesses and properties provided via the quarterly updates and EOPS, as well as information on other sources of income that fall outside of MTD, such as dividends and interest.

• You’ll then need to legally declare – via the final declaration – that you’ve provided HMRC with all the information it requested and that you agree with its income tax calculation.

• The final declaration applies to individuals, and not to individual businesses and/or property income, so you’ll only submit one each tax year.

While this may sound like a lot of documentation, compatible accounting software will automate these tasks and you’ll do less admin work than under the traditional Self-Assessment process. The process is still being tested and accountants and agents are engaging with HMRC to test and improve the system.

As your accountant, we will assist our clients with making sure allowances and tax reliefs are claimed.

How do I see this affecting Anlo clients?

My plan with Anlo clients is to actively think about each client’s needs and have a discussion with them about how this change can actually benefit them and improve their tax situation and business.

At this stage we don’t know enough (November 2022) about how the changes in the process will happen so it would be premature to start guessing now.

What we do know is everything is moving towards digital submission and that won’t change. Freeagent, Xero, and Quickbooks are great accounting packages that can help your business and benefit you as the business owner to achieve your goals.

So why not start early and get your business accounting system online?

Sole traders and individual landlords who earn more than £10,000 per year rental income or £833 per month, will highly likely look at an additional charge of £5-£10 per month for an accounting software and if they require assistance from Anlo to process and file their MTD returns, another £25 per month for our time.

This will be per stream of income so if you own property and receive rental income, there will be a monthly charge, and if you also have a sole trader business, there will be another return and charge for submitting this return.

This is only an estimate and Anlo hasn’t decided on our pricing structure yet. But I wanted to make you and our clients aware of the change and what this will cost. For retainer clients, we will review the pricing based on what their business requires.