Last updated: 25 Mar 2021 04:09 Posted in: AIA
As we are aware on 01 April 2021, the soft-landing period for eligible businesses over the VAT threshold to comply with Making Tax Digital (MTD) for VAT will come to an end. Anyone currently following the rules of MTD for VAT will need to make sure that the software they use is able to send information directly to HMRC going forward.
Rachel Rutherford, Director of Policy and Public Affairs added: “This marks the start of a series of incoming tax changes that will impact how sole traders and landlords file their tax returns to HMRC.
“Whilst your clients have until January 2023 to implement these changes as part of MTD for Income Tax, AIA would encourage the transition to begin sooner rather than later as the longer your clients leave it, the harder it will be to adjust.”
AIA spoke with Mike Parkes from strategic partner, GoSimpleTax and asked him to break through some of the myths and set the record straight on what you need to do to prepare yourself and your clients.
What is MTD, Just In Case You Need Reminding…
MTD is a government initiative designed to digitalise taxes in the UK. According to the HMRC, avoidable mistakes cost the Exchequer £8.5bn between 2018 and 2019. Digitalisation would mean that income can be more effectively assessed, and taxpayers will find it easier to get their tax right.
Initially, the legislation only applied to some VAT-registered businesses with a taxable turnover above the VAT threshold of £85,000 (with those below the threshold required to follow the rules from April 2022). Soon, however, it will apply to sole traders and landlords with an annual income exceeding £10,000. This will begin in 2023 – specifically, from their accounting period starting on or after 6th April 2023.
How does it affect sole traders and landlords?
Sole traders and landlords with income above £10,000 will be required to use compatible software to keep digital records and send HMRC updates for their Income Tax. This means the end of the free HMRC tax return submission tool – instead, your client’s need to choose an HMRC-recognised platform that’s compatible with MTD for Income Tax.
There will also no longer be a need to submit a Self Assessment tax return. In its place, your clients will be required to send four quarterly updates, an end-of-period statement, and a final declaration to HMRC. But don’t worry, if your clients are now using software, you will both end up spending less time on admin under this legislation than you did previously.
What are quarterly updates?
At least every three months, your client will need to send HMRC a statement of their business income and expenses. The same is true for any property income that they earn. This allows HMRC to present you with a more up-to-date forecast on how much tax they will owe.
Again, software should make this process easy for you as you can log income and expenditure information in real time.
What about end-of-period statements and the final declaration?
End-of-period statements (made at the end of the accounting period or tax year) will involve a similar process to the current one for Self Assessment tax returns.
As for your clients final declaration, this is where they confirm that the figures submitted to HMRC are final and correct. This submission will then be used as the basis to calculate any tax they need to pay.
Why should I prepare now?
While sole traders and landlords have until 2023 before MTD for Income Tax comes into effect, if your clients leave it too late to sign up for approved software, 2023 could be a bit of a nightmare year.
Not only would they need to submit their 2021/22 tax return by 31st January 2023 as normal, they would also then have to quickly get up to speed with MTD for Income Tax before their first MTD submission. This first submission would most likely be for the period 6th April 2023 to 5th June 2023, and be due no later than 5th July 2023.
That’s why we recommend familiarising yourself and your clients with digital tax return software as soon as possible. By beginning to log their 2021/22 income and expenditure as and when they occur, you can both effectively be ready to submit the corresponding tax return as soon as you’re able to (6th April 2022, the start of the tax year). That means you and your client won’t have to worry about the 31st January 2023 filing deadline, freeing you both up to focus on your new MTD responsibilities.
You can start by choosing an MTD-compatible platform today, and getting to grips with keeping digital records. So what are you waiting for? 2021 is the perfect year to get organised.
“This marks the start of a series of incoming tax changes that will impact how sole traders and landlords file their tax returns to HMRC.
“Whilst your clients have until January 2023 to implement these changes as part of MTD for Income Tax, AIA would encourage the transition to begin sooner rather than later as the longer your clients leave it, the harder it will be to adjust.”
