Making Tax Digital For Sole Traders – Q&A

Making Tax Digital (MTD) for Income Tax Self Assessment (ITSA) was announced back in 2015 and is due to come into effect in April 2024; however, new figures suggest that around 1 in 5 sole traders have never even heard of it.

 

If you’re not sure what MTD for ITSA is, or whether it applies to you, don’t worry! In this article we’ll be answering the most common questions, helping you get prepared and ready for MTD for ITSA in plenty of time.

 

What Is MTD? And What Does MTD For ITSA Mean?

MTD basically means running and maintaining your accounts digitally through specific MTD-approved software. It’s been introduced by the Government as a way of helping businesses “get their tax right” as the software used helps to make accounts more efficient and accurate, with less mistakes. It’s already in play for VAT-registered businesses – they’re now required to submit their VAT returns via MTD-approved software.

So what’s MTD for ITSA? Simply put, it just means that the MTD requirements are now being rolled out for Income Tax too. Therefore, sole traders (along with other self-employed businesses, individuals and landlords) that have a total gross income of over £10,000 a year will need to submit their Income Tax online via MTD-approved software from April 2024.

 

What Do Sole Traders Need To Do To Be MTD Compliant?

2024 may seem like it’s in the distant future but it’s really important that you start thinking about MTD now. Before you can sign up, you’ll need to have chosen your MTD-approved software. The earlier you do this, the better: it will give you more time to get acquainted with the software and feel confident using it. Different software will suit different businesses so you’ll want to start having a think about which solution will suit your business best.

We’re committed to helping you find the most effective cloud-based bookkeeping package for your requirements. That’s why we’ve teamed up with some of the leading MTD-approved cloud bookkeeping solutions, so that our clients have the choice of a variety of software options helping them find the perfect fit. We’re also on hand to offer software training and recommendations if and when needed. In addition, we can occasionally offer discounted licences* to our clients! For more information about our MTD partnerships, visit our website. Here you’ll also find a free FreeAgent webinar where one of our accountants will talk you through this award-winning software.

*discounted licences are available on a first-come-first-served basis, and may not be available at your time of enquiry

Once you’ve chosen your MTD-approved software, you’ll need to register for MTD for ITSA – even if you’re already registered for MTD for VAT! People often forget to sign up until it’s too late, or don’t realise that they need to register separately for MTD for ITSA, so please do make a note to register before the deadline of April 6^th 2024. If you’d prefer your accountant to register on your behalf, they can do so – get in touch to find out more.

If you’re eligible to take part, we’d recommend considering signing up for the Government’s voluntary scheme. It’s currently asking eligible individuals to sign up early to help ensure that the process is efficient and effective. Doing so will give you plenty of time to adjust to the new requirements before it officially comes into effect. If you’d like to find out more, please visit the MTD for ITSA guidance page.

 

Are There Any Free MTD-Compliant Softwares?

It doesn’t look like it, unfortunately. Initially the Government was planning to design one but it’s not looking hopeful since MTD has been around for a few years now and the HMRC free-to-use option has not appeared.

It’s not all bad news, though. Although the initial costs will obviously be unwelcome, cloud bookkeeping software will save you time and money in the long run. If you ask other business owners who have already made the transition, we’re sure that you’ll hear that it’s proved very cost-effective: it’s quick, simple, reduces the risk of mistakes and makes accounting so much easier and more convenient. You can learn more about the approved cloud bookkeeping software you could choose via our software recommendations.

 

Will I Still Need To Submit A Self Assessment Tax Return?

No – instead of submitting an annual tax return, you’ll need to do the following:

1. Send quarterly updates to HMRC
2. Submit an End of Period Statement (EOPS)
   (This is to correct any errors or items missed out of those returns, but this can normally be dealt with by your accountant after the end of the tax year.)
3. Submit a final declaration or crystallisation
   (Filing the EOPS alone won’t always finalise your tax affairs for any one tax year so that’s why you will also need to submit a final declaration or crystallisation. This will bring together all business and personal information needed to determine your final tax liability, including information from the EOPS and information on non-MTD sources of income like dividends and interest.)

All of the above will need to be completed (and any tax paid) by the usual deadline of 31^st January following the relevant tax year.

 

What Is ‘Pay As You Go’ Tax?

As mentioned above, you’ll need to report to HMRC every quarter. Because of this, you’ll have a far better insight into your upcoming tax bill, making it easier to manage your money and budget for your tax bill. But what exactly is the ‘Pay As You Go’ tax? It’s a suggested initiative that would mean that you’d be able to spread your tax bill payments over the year, rather than be hit with one large sum at the end! While not yet in place, it is looking likely that this will go ahead. We’re hoping that more information will be released about this in the coming months.

 

Who Needs To Keep Digital Records For Self-Assessment?

Under the requirements of MTD for ITSA, individuals who are subject to income tax on the profits of their trade, profession, vocation or property business will be required to keep their accounting records electronically.

 

What Are The Reporting Requirements?

We understand that separate quarterly updates will be required for each trade or property business carried on by an individual.

All businesses within MTD for ITSA will have to provide quarterly updates of their income and expenses for the following periods, by the following deadlines, regardless of their accounting period end.

Period covered		Filing deadline
Quarterly update 1	6 April to 5 July	5 August
Quarterly update 2	6 July to 5 October	5 November
Quarterly update 3	6 October to 5 January	5 February
Quarterly update 4	6 January to 5 April	5 May

Alternatively, businesses can make a ‘calendar quarter election’ which allows them to draw up quarterly updates to the end of the previous month.  Where this election is made, the quarterly updates will be as follows:

Period covered		Filing deadline
Quarterly update 1	1 April to 30 June	5 August
Quarterly update 2	1 July to 30 September	5 November
Quarterly update 3	1 October to 31 December	5 February
Quarterly update 4	1 January to 31 March	5 May

 

Can My Accountant Handle My MTD Bookkeeping?

Yes – for the most part. Your accountant can oversee a lot of the bookkeeping duties; however, you will still be required to be involved in some of the processes. If you’d prefer your accountant to manage your bookkeeping, please contact us for more information and we’ll provide a clear breakdown of what we can manage on your behalf and what your requirements are.

 

What Happens If I Don’t Comply With MTD By April 2024?

You need to make sure you’re compliant before the deadline; otherwise you run the risk of receiving financial penalties. A new ‘penalty points’ system will be coming into play for anyone who misses submission deadlines or fails to pay their tax bill on time. It’s said that this new system will be fairer, penalising those who consistently fail to meet deadlines, whilst being lenient on those who make the occasional mistake.

Penalties For Late Submission

Similar to that of a speeding fine, if you miss a submission deadline you’ll be given a ‘point’. If you continue to collect points through failing to meet submission deadlines, you’ll receive a £200 fine (the number of points needed before a fine is issued may vary depending on specific requirements).

Penalties For Late Payment

The penalty you receive for late payment will depend on how overdue your tax bill is. You’ll most likely receive a penalty that is set on a percentage of your tax bill, but you could also face a second charge which increases the longer that the payment is overdue.

Penalties like this can escalate quickly so that’s why it’s important to ensure you’re compliant with MTD requirements before the deadline. You can find the full penalty information via the Gov website.

 

How Do I Get Started?

First things first – start having a think about the different types of MTD-approved software available and which one you think would suit your business best. As we mentioned above we’re always here to help so please do get in touch for personalised recommendations and ongoing support. Once you’re happy with your software of choice, make sure you then sign up for MTD for ITSA.