Making Tax Digital: Small Business Review

Introduction to Making Tax Digital (MTD)

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Making Tax Digital (MTD) represents a fundamental change in how the UK tax system operates. Aimed at modernising and simplifying tax administration, MTD mandates the digitalisation of tax reporting and record-keeping for small businesses and self-employed individuals. This initiative, spearheaded by HMRC, is a step towards making tax management more efficient, effective, and easier for taxpayers.

Making Tax Digital for VAT was implemented in April 2019 and further extended in 2022, meaning all VAT-registered businesses are automatically signed up for MTD by HMRC. 

On 22nd November, the government published its Making Tax Digital Small Business Review 2023. This article will summarise the main points covered in the announcement and their effect on small businesses and Making Tax Digital requirements.

What is MTD for ITSA?

Making Tax Digital for Income Tax Self Assessment (MTD for ITSA) will mean that self-employed individuals and landlords must use compatible software to keep digital records and submit them to HMRC for their tax return. They must send these updates quarterly to improve the accuracy of business records, reduce the tax-gap and minimise administrative costs for small businesses.

• Digital Record-Keeping: Businesses must use MTD-compatible software to keep digital records of their income and expenses.
• Quarterly Updates: Submission of summary data to HMRC every three months.
• Final Declaration: Replacing the self-assessment tax return, confirming the final figures for the tax year.

The MTD Timeline: Key Dates and Phases

• April 2023: Introduction of Making Tax Digital for Income Tax Self Assessment (MTD for ITSA).
• April 2026: Self-employed individuals and landlords with annual incomes over £50,000 must join MTD.
• April 2027: Self-employed individuals and landlords with annual incomes over £30,000 must join MTD.

Regarding small businesses/sole traders/landlords with annual income under £30,000, the government has decided to keep mandatory compliance with MTD under review. 

Their reasoning is to give the initiative time to be tested by businesses already compliant and, over the next few years, as more businesses are mandated to comply, to improve the system based on feedback.

This means that businesses with lower turnover will avoid incurring unreasonable costs to comply with MTD, as when they must comply, the system will have been refined and streamlined. 

Further Changes Announced

• The current design of Quarterly Updates will be changed in the coming months to make it easier for users to amend or correct errors throughout the tax year.
• Each update will be cumulative for the tax year rather than the period. This reduces unnecessary admin in that there is no need to manually calculate the overall figures for the year at any point – the system will automate the process.
• Regulations are set to be published that remove End of Period Statements completely – removing the duplicate information already submitted in the Final Declaration. This is another example of the process becoming more straightforward and more streamlined.
• Certain groups are now exempt from MTD for ITSA requirements – foster carers having been identified as a group that do not gain a lot from digitising their tax returns. Therefore, receipts for qualifying care income will not need to be submitted digitally via MTD-compliant software. Please note: It is important to check with HMRC about your financial circumstances before deciding whether you need to comply with MTD.
• Customers who are unable to obtain a National Insurance Number will not need to comply with MTD for ITSA.
• Customers will be able to be represented by more than one agent for their MTD requirements. For instance, one accountant may handle the quarterly updates and uploading of digital records, another accountant may handle the final yearly tax return calculation and payment. 

Preparing for MTD: Action Steps for Small Businesses

Small businesses and self-employed individuals need to prepare for these changes. Key actions include:

1. Understand the Requirements: Familiarise yourself with MTD regulations and deadlines.
2. Choose Compatible Software: Select MTD-compatible software for record-keeping and reporting.
3. Plan for Quarterly Updates: Adjust bookkeeping practices to meet quarterly reporting requirements.
4. Seek Professional Advice: Consult an accountant or tax advisor for tailored guidance. 

Jack Ross Chartered Accountants has a wealth of experience in dealing with Making Tax Digital compliance, using cloud accounting software Xero to simplify our client’s finances and help them prepare for mandatory compliance dates well ahead of schedule. 

If you’re in need of our services, please use the contact form below and one of our Jack Ross tax experts will be in touch to discuss next steps. 

Conclusion: Jack Ross Can Help

The introduction of Making Tax Digital is a pivotal moment for the UK’s tax system, especially for small businesses and the self-employed. While it presents challenges, it also offers opportunities for improved financial management and efficiency. By staying informed, planning effectively, and embracing the digital transition, small businesses can thrive in this new era of tax administration.

Looking to make your business Making Tax Digital compliant? Fill in the contact form below and a member of our dedicated team will be in touch to discuss next steps.