The way that some self-employed taxpayers report their business profits to HMRC is set to change under the Making Tax Digital (MTD) for business regime, when it begins to apply to Income Tax reporting.
This is a freeview 'At a glance' guide for the many self-employed taxpayers, company owners and property landlords who are unaware of HMRC's radical plans to transform the tax online filing system.
At a glance
Background: MTD for VAT
- MTD for VAT was extended to all VAT registered businesses from April 2022.
- Under MTD for VAT, you must retain digital records and submit VAT returns to HMRC using 'functional compatible software'.
MTD for Income Tax Self Assessment
- Under MTD, the Self Assessment tax return will be replaced by five new reporting obligations made during and after the tax year. There will be quarterly updates required and a year-end final declaration.
- This measure was due to commence for accounting periods starting on or after 6 April 2023 for self-employed businesses and landlords with business turnover above £10,000. This has been delayed and the new start date is 6 April 2026 for businesses and landlords with income over £50,000 and 6 April 2027 for those with income over £30,000 (regardless of accounting period end date).
- In most cases, MTD will not start until 6 April of the third year of trading for businesses that commence on or after 6 April 2026/6 April 2027.
- Non-UK resident or domiciled individuals will have to follow MTD where they have UK self-employment and/or UK property and meet the turnover threshold.
- UK residents will have to follow MTD if they have foreign property income that meets the threshold (may be combined with other self-employment or UK property turnovers).
- See MTD: Toolkit for accountants for detail of how this start date may interact with the proposed Reform of basis periods.
- Digital records of all transactions will be needed. These will form the basis of the quarterly updates.
- If you are not already using software for your record-keeping/accounting, you will need to learn how to use a spreadsheet or some type of accounting software or App which is MTD compliant.
- You will need a reliable internet connection and a facility to store your electronic data.
Five tax returns per year
- Quarterly updates must be submitted to HMRC, with everyone adhering to the following quarter dates:
Quarter | Period | Deadline |
1 | 6 April - 5 July | 5th August |
2 | 6 July - 5 October | 5th November |
3 | 6 October - 5 January | 5th February |
4 | 6 January - 5 April | 5th May |
- An election can be made to change to calendar quarters, which will stay in place until withdrawn. The filing deadlines will remain the same.
- An End of Period (EOP) statement must be then made for the relevant period, containing all the required information and a declaration that the information is correct and complete to the best of the taxpayer's knowledge.
- The EOP must be filed by 31 January following the relevant tax year unless later under s8 or s8A TMA 1970.
Tax payments
- The tax liability will need to be paid by 31 January of the next year (as is currently the case).
- You will be allowed to voluntarily pay your taxes as you go: the detail is still being decided.
- Eventually, it is possible that you will be required to make four payments per year on account of tax.
Penalties
- There will be no late filing penalties for at least a year while the new system beds in. After that, you will suffer penalties if you file your returns late.
- Penalties already apply for errors in returns or documents.
- Late payment interest already applies.
- See Penalties: Making Tax Digital
What will I need?
What information will I need?
Before you can sign up you will need compatible software (see below).
First of all you will need your Government Gateway user ID and password (this is the one you use to file your Self Assessment return). You will have the option to create one when you sign up, if you do not have one already.
You will then need the following information in order to sign up:
- Business name
- Email address
- National Insurance number
- Business start dates and registered address
- Accounting period
- Accounting type such as cash or standard accounting
Sign up via Gov.uk
What equipment (hardware) and software or Apps will I need?
- Your requirements depend on you, how you feel about technology and the nature of your business.
- Every business is different.
- If you use an accountant you can continue to do so.
- You can delegate all your bookkeeping and online filing to an accountant, tax adviser or bookkeeper if you feel you cannot cope with this new system.
- If you are one of the two million taxpayers who do not engage any professional help in reporting to HMRC you need to decide which system to use.
- Accounting using a phone is not for everyone, choose what may be best for you from the table below.
See Compare software for Making Tax Digital for Income Tax
Equipment/system: | Phone or tablet apps | Computer/tablet & spreadsheet |
Computer/tablet & accounting software |
About you/your business. Not all will apply. chose the ones which may apply to you. |
You own a smartphone or a tablet. You always have good internet access or a phone signal. You are happy to enter data onto your phone or tablet. You rarely need to issue paper invoices: your customers don’t want or expect receipts. Your expenses are pretty simple and you don’t expect to have many queries You don't give customers credit. You do not have many transactions in a tax year. You mainly receive your income in cash and payout your expenses in cash. You keep a separate business bank account. You like to do your bookkeeping every day. |
You have access to a computer. You have internet access. Internet and phone signals may be restricted. You would rather use a big screen/don’t like/don’t use a phone for data entry. You are familiar with spreadsheets/you are not good with software/technology. You need a simple system to replace your manual bookkeeping system. You pay for goods using cash or bank card or credit card. Your income comes in by cash, cheque or online banking. You do quotes for customers or your customers like receiving invoices. You allow basic credit to customers. You have a business bank account or you use one bank account for business and private transactions. |
You have a computer. You would rather use a big screen/don’t like to use a phone for data entry. You are OK with software. You are willing to learn new systems. You pay for goods using cash or bank card or credit card. Your income comes in by cash, cheque or online. You do quotes for customers or your customers like receiving invoices. You need credit control. You have a business bank account or you use one bank account for business and private transactions. |
Present bookkeeping method(s) may include: |
You keep receipts for payments, total up mileage per MOT certificate, maybe use a diary and total up everything at the end of the tax year using bank statements. You keep a paper cash book. You enter details on your tax return once a year. |
You maintain a receipt book or keep a pile of issued invoices to record sales. You keep receipts in a box and enter them in batches during or at the end of the tax year. You manually check over your bank statements to check you have captured all the relevant income and expenses. You keep a paper cash book or use a spreadsheet to summarise your income and expenses. You enter details on your tax return once a year. |
You do all your bookkeeping using your software. You generate an invoice for your sales from your software and you like to keep receipts on paper and then enter them in batches into the software. You might sometimes use a spreadsheet for summaries. You enter details on your tax return once a year. |
Changes with Making Tax Digital |
You have real-time recording of income/sales. You record all your income and expense on your phone and store the data in the cloud. Your App sends your bank receipts and payments to your summary for HMRC. You have to check each transaction to set up the system, you will need to manually enter your cash sales and purchases. Your App sends your figures to HMRC every quarter, You still have to make the usual accounting adjustments at the year-end in the final year-end report. It is best to avoid using a personal bank account for business. This will make your bank feed more complicated. |
You use a spreadsheet instead of a paper book to:
Your spreadsheet will now have to link to HMRC to allow quarterly reporting. Software will become available to do this as the software market grows. Depending on the results of its test pilots, HMRC may allow you to manually enter your quarterly figures. You still have to make the usual accounting adjustments at the year-end. |
Your software will need to be updated to allow MTD filings. If your software does not have a bank feed then you can update to add that. You still have to make the usual accounting adjustments at the year-end. It is best to avoid using a personal bank account for business. This will make an automatic bank feed more complicated. |
Verdict |
Good for very small technically minded businesses with reliable internet who like entering data on phones/tablets daily. |
Good for any size of business if you prefer a simple system where you can see all your transactions on a big screen and you don't have to do bookkeeping daily. |
Good for any size of business if you prefer a system where you can see all your transactions on a big screen and you don't have to do bookkeeping daily, provided that you are happy to learn new software. |
Digital exclusion opt-out
- If you are reading this guide you are probably online and this might not apply.
- You will be excluded from the electronic bookkeeping and filing elements of MTD if you are unable to handle it due to age, disability or location or if it is contrary to your religion. You will need to satisfy HMRC that you cannot do so before they will agree to the exemption.
Small print & links
Useful guides on this topic
MTD: Toolkit for accountants
What is the current timetable for Making Tax Digital? How will it work? Which clients will be excluded? What planning needs to be undertaken?
Making Tax Digital: Index & timeline
When does Making Tax Digital (MTD) apply? What does Making Tax Digital really mean? How will it affect you? Does MTD mean quarterly reporting? Is my business exempted from Making Tax Digital?
MTD: Income Tax Pilot Tool
Making Tax Digital (MTD) for Income Tax. Are you eligible to take part in the MTD Pilot?
Making Tax Digital: Pricing for Accountants
How much can you charge? How much should you charge?
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