Making Tax Digital for income tax, and proposed changes to basis periods for the self-employed has been delayed by a year.
Making Tax Digital
Making Tax Digital (MTD) is the new digital system for tax reporting to HM Revenue & Customs (HMRC).
Many VAT registered businesses will now be used to using MTD for VAT where they are required to register for VAT. All businesses registered for VAT will need to use MTD for their VAT compliance from 1 April 2022.
MTD is also set to be implemented for income tax and corporation tax reporting.
MTD for income tax was set to be implemented from 6 April 2023, however, it has now been announced that this will be delayed by a year to 6 April 2024.
HMRC hope (albeit it is yet to be evidenced thorough the VAT process that is now running) that MTD will make the tax system more effective and efficient and make it easier for tax payers to get their tax right, but thankfully, have now acknowledged that in order for this next step to work, they need to allow everyone enough time to recover from the pandemic and prepare for this change. HMRC also undoubtedly need time to implement systems and processes.
MTD for income tax will initially only apply for individual businesses and/or property landlords with total business or property income (turnover/gross income) above £10,000 per annum.
General partnerships earning over £10,000 are not required to join until 6 April 2025 (and other partnerships at a later future date – presumably aligned to the implementation date of MTD for corporation tax).
All businesses and landlords who join MTD for income tax will be required to keep their business records digitally and send a quarterly summary of their business income and expenses to HMRC using software able to integrate with HMRC systems – known as MTD-compatible software. HMRC will then provide them with an estimated tax calculation based on the figures sent in, to assist with budgeting for the end of year tax bill.
At the end of the year, the business/landlord can add any non-business information and finalise their tax affairs using the MTD-compatible software.
Does this apply to you?
If you were self-employed or collecting property income before 6 April 2023, you will need to sign up for MTD for income tax if you were registered for Self-Assessment and you meet the total qualifying income of £10,000.
There are no changes to the deadlines for end of year filings or to the tax payment deadlines.
Quarterly filing deadlines will be 5 August, 5 November, 5 February and 5 May each year. These are the same regardless of whether you are reporting under the standard periods i.e. 6 April to 5 July, or under the calendar periods i.e. 1 April to 30 June.
A new points based system will be used by HMRC to issue penalties on late submissions. A point will be issued on every late return and at a certain threshold of points a financial penalty will be charged. The threshold is determined by how often a tax payer is required to make their submission
End of Year process
Essentially this will still be the same process as it is now, there just won’t be an actual tax return form. The process will be known as the End of Period Statement (EOPS) and one will be required for each income source.
You will also need to make a final declaration to HMRC that you have provided them with all requested income and you agree with their income tax calculation. We are able to submit the EPOS and the final declaration as agent, on behalf of all our clients.
This all might seem a lifetime away, especially as we are still dealing with the pandemic, but we do recommend you start to think and plan for this change now so if you think you will be affected by MTD for income tax and would like to discuss this, then please get in touch with your usual contact at RRL.
MTD for corporation tax
There is no set date for the implementation of MTD for corporation tax, it has only been announced that this will not be before 1 April 2026.
Proposed changes to tax basis periods
Tax basis period consultation
This summer, the government published a consultation document (see here) seeking opinions on simply taxing trading profits that are realised in a tax year (6 April – 5 April – unless the tax year is changed, which is the subject of another consultation), replacing the current system of ‘basis periods’ that generally result in trading profits being taxed in relation to the chosen accounting period end that falls within a tax year (albeit special rules for years of commencement and closure).
This would probably take the form of a mandatory 31 March or 5 April year-end (or potentially 31 December if the tax year is changed to a calendar year – the subject of a Office of Tax Simplification report published earlier this year).
An alternative proposal is to use a system akin to the current corporation tax model, whereby tax payment dates for liabilities on profits are directly linked to the accounting date (as opposed to the fixed 31 January and 31 July for income tax irrespective of the accounting year-end adopted).
These proposals are clearly driven by attempting to facilitate further digitisation of the tax system (making the HMRC implementation and operation of MTD for income tax easier), and improving cash flow for the Treasury.
The government recognise the need for transitional arrangements and refer to these in the consultation document. The proposal being to spread profits in the ‘transition year’ over a five year period.
The consultation closed on 31 August 2021 and the response document is yet to be published.
In our view, this is a change that is likely to be implemented on the implementation of MTD for income tax. A letter from the Financial Secretary to the Treasury to the various professional tax bodies has now been published stating:
“With regards to Basis Period Reform, many respondents said that the reform was a sensible simplification but asked for more time to implement the changes. In recognition of these concerns, these changes will not come into effect before April 2024, with a transition year not coming into effect earlier than 2023. The Government will respond to the consultation in due course providing the next steps.”
Consequently, this implies that if the changes were implemented, they would not be implemented before 6 April 2024 and implied that the transition year would be the 2023/24 tax year.
As always, we will keep you updated on these proposed changes.