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Category: Making Tax Digital

Last chance to make sure your business is ready for MTD

Last chance to make sure your business is ready for MTD

Companies and sole traders who have not yet finalised their plans to comply with Making Tax Digital are in the last chance saloon this month, and the very latest date you have to comply with MTD for paying VAT is August 7.

That is the latest date on which you will need to make your first – if you are not already doing this – MTD VAT return. So, if you have not already done so, you have very little time left to make sure you comply with this legislation.

Your responsibilities

Whether you are required to pay VAT – because your business turnover is above the £85,000 threshold at which you are required to register – or because you have voluntarily registered, you now must keep your records and file your returns electronically.

How do I file?

From April 1, you will need to have filed any VAT due through MTD-compatible software, which includes the likes of QuickBooks and Xero, among others. If you are not able to file your return this way, then HMRC can currently issue a £400 fine. But from January next year, HMRC is due to bring in a points system, which means you accrue points each time you miss a deadline. Once you hit a certain number of points, you will face a £200.

So, the best thing you can do is prepare yourself properly. If you have not sorted this out already, you really are running out of time.

We can help you meet your obligations

If you are not yet registered to deal with MTD through relevant accounting software, then we can help you. But there is no time to lose. Please get in touch with us as soon as you can, and we will do everything in our power to help you meet your filing deadlines.

July 11, 2022

MTD D-Day has arrived – here’s how to make sure you comply

MTD D-Day has arrived – here’s how to make sure you comply

Anyone filing VAT returns from April 1, 2022 onwards now has to file their return digitally as HMRC’s Making Tax Digital reaches its next phase.

All businesses registered for VAT – even if they have turnover below the threshold – must file their returns this way from now on. The premise for changing to the MTD regime is to reduce the number of common mistakes made, according to HMRC, and will save taxpayers time when it comes to managing their tax affairs.

However, it is also a key plank of digitising the UK’s tax regime, and MTD is likely to have increased revenue to HMRC thanks to reduced errors in both 2019 and 2020, said HMRC.

Sign up now if you haven’t yet

Nearly 1.6m taxpayers had already joined MTD for VAT as of December 2021, and more than 11m returns have already been submitted this way. Around a third of those businesses with a turnover below the £85,000 VAT threshold signed up before April 1, 2022 and “thousands more are signing up each week”, said HMRC.

Lucy Frazer, Financial Secretary to the Treasury, said: “Businesses using MTD are saving time on their tax affairs, streamlining their processes, and boosting their productivity as a result.

“[This is] our first move towards a modern, digital tax service – MTD makes it easier for businesses to get their tax right first time. There is a range of support and information available for those that need it – including accessible online content such as YouTube videos, GOV.UK help pages and HMRC’s Extra Support service.

“Agents can sign up on behalf of a business, although businesses remain responsible for meeting their VAT obligations. Those who do not join may be charged a penalty for failure to do so.”

Businesses must sign up before they send their next VAT return

Any businesses that have not yet signed up need to before they file their first VAT return after April 1, 2022. There are a number of software options that can be used, including free options for the easiest of calculations, or more advanced for more complex affairs, said HMRC.

list of software compatible with MTD for VAT is on Gov.UK and there are webinars being run by HMRC for taxpayers who need more help and support on signing up for MTD to make sure they comply.

There are some exemptions

Some VAT-registered businesses can receive exemptions, primarily where it is not reasonable or practical for them to use digital tools for their tax. These include reasons based on age or disability, or a religious objection to using computers. But any other reasonable basis for exemption will be considered by HMRC. You can find more information on whether an exemption may apply on Gov.UK.

While you are waiting for a final decision, continue to file your returns as you usually do.

MTD for income tax 2024

MTD is being extended to 4.2m income taxpayers who are landlords, sole traders and partnerships from 2024. Anyone with business and/or property income over £10,000 will be brought into the regime then. So, it is worth starting to plan ahead with your accountant to make sure this transition is as smooth as possible.

Contact us

Please get in touch with us to find out how we can help you if you are yet to sign up for MTD. We can help you comply with the new rules.

May 3, 2022

ITSA registration

ITSA registration

HMRC have published a call for evidence on the case for reforming the rules for registering for Income Tax Self Assessment (ITSA). The call for evidence is interested in hearing views on whether it would be beneficial to bring forward the deadline by which landlords and the self-employed must register for ITSA.

Current rules

Currently, there is no statutory obligation to register for ITSA; instead, the requirement is to notify HMRC where a tax liability exists. This must be done within six months from the end of the tax year in which the liability arose, i.e., by 5 October after the end of the tax year. This requirement is met by registering for ITSA. Where the taxpayer is self-employed, registering for ITSA also registers the taxpayer for Class 2 National Insurance.

If a taxpayer who is already within ITSA has a new source of income, there is no requirement to tell HMRC separately about that new source. Instead, it is reported on the self-assessment tax return.  

The notification window depends on when in the tax year the self-employment starts or the taxpayer becomes a landlord. For example, if you started your self-employment on 6 April 2021, you must notify HMRC (normally by registering for ITSA) by 5 October 2022 – a window of 18 months. However, if you start your self-employment on 31 March 2022, you still have to notify by 5 October 2022 – a window of just over six months. This is because the notification deadline relates to the tax year in which the trade started rather than the date on which the trade started.

Possible reforms

The call for evidence sets out options for a possible reform of the rules. The first option is to reform the existing requirement to notify rules so that the taxpayer is required to notify HMRC of the liability to tax within a set window after the source first arose. Potential notification windows of two, three or four months are suggested.

The second option is to remove the current statutory obligation to notify, and to replace it with a requirement to register for ITSA within a specified period after the start of the self-employment or property business. Alternatively, the obligation to register could be triggered once turnover reaches a certain level, for example, £1,000 to align with the trading and property income allowances.

HMRC may also explore ways in which third-party data could be used to identify those who have recently started in business so that they can be made aware of the need to register, if they have not already done so.

Get in touch

If you have recently started a business or become a landlord, please get in touch. We can help you register for tax.

January 17, 2022

Extension of Making Tax Digital for VAT

Extension of Making Tax Digital for VAT

Making Tax Digital (MTD) for VAT is currently only compulsory for VAT-registered businesses whose turnover for VAT is above the VAT registration limit of £85,000. However, this is set to change from April 2022.

Extension to all VAT-registered businesses

Currently, if you are registered for VAT, but your turnover for VAT purposes is less than the VAT registration threshold of £85,000, you can join MTD for VAT voluntarily.

From 1 April 2022 onwards, MTD for VAT will become compulsory for all VAT-registered businesses, regardless of their turnover. If you are registered for VAT, your turnover is below the VAT registration threshold of £85,000 and you have not joined MTD for VAT voluntarily, MTD for VAT will apply to you from the start of your first VAT accounting period which begins on or after 1 April 2022.

Getting ready

If you will fall within the scope of MTD for VAT on or after April 2022, you will need to plan ahead. Under MTD for VAT, you must maintain digital VAT records and file your VAT returns using MTD-compatible software. HMRC publish details of compatible software packages which can be used.

You will also need to sign up for MTD for VAT.

We can help

We can help you get ready for MTD for VAT. Why not get in touch?

October 23, 2021

Basis period reform

Basis period reform

HMRC have been consulting on the reform of the basis period rules in preparation for the introduction of Making Tax Digital for Income Tax Self-Assessment (MTD ITSA), which comes into effect from April 2023. A consultation paper was published in July 2021, which sets out new simplified basis period rules. Comments were sought by 31 August 2021 on how best to implement the reforms.

Existing rules – the current year basis

Once an unincorporated business is established, it is taxed on the current year basis. Special rules apply in the opening and closing years of the business. Under the current year basis, the profits that are taxed for a particular tax year are those for the accounting period that ends in that tax year. Consequently, if the business prepares its accounts to 30 June each year, for the 2021/22 tax year, it will be taxed on its profits for the year to 30 June 2021, as this is the year that ends between 6 April 2021 and 5 April 2022.

Under the existing rules, some of the profits of the business may be taxed twice in the opening years. These profits are known as ‘overlap’ profits. Relief for the double taxation of these profits, known as ‘overlap relief’, is given when the business ceases, or earlier if there is a change of accounting date.

New rules – tax year basis

The reforms will mean that unincorporated businesses will be taxed on the profits arising in the tax year – i.e., the profits for the period from 6 April to the following 5 April. Where the business prepares accounts to 31 March, these will be deemed to correspond to the tax year (as will the preparation of accounts to any date between 31 March and 5 April).

If you prepare accounts to a date other than 31 March/5 April, you will need to apportion your profits so that they correspond to the tax year. For example, if you prepare your accounts to 30 June, for 2023/24, you will be taxed on 3/12th of the profit for the year to 30 June 2023 (covering the period from 6 April 2023 to 30 June 2023) plus 9/12th of the profit for the year to 30 June 2024 (covering the period from 1 July 2023 to 5 April 2024).

The tax year basis will apply from 2023/24, with 2022/23 being a transitional year.

Estimation of profits

If you have an accounting date late in the tax year and prepare accounts other than to 31 March/5 April, you may not have the second set of accounts available when you come to complete your tax return. For example, if you prepare your accounts to 28 February, for 2023/24 you will be taxed on 11/12th of your profit for the year to 28 February 2024 and 1/12th of your profit for the year to 28 February 2025. The accounts to 28 February 2025 will not be available by 31 January 2025, and you would be expected to file a provisional return, which would be amended later when the information is available.

This will create extra work, and HMRC are looking at alternative estimation approaches, such as making an estimate based on the profits for the quarterly updates submitted under MTD ITSA, extrapolating the profits for the ‘known’ part of the tax year, and allowing the final figures to be provided as part of the following year’s return.

To overcome this, you may prefer to change your accounting date and prepare accounts to 31 March/5 April. This will avoid the need for an apportionment calculation and reduce your workload.

Transitional rules

Transitional rules are needed to move from the current year basis to the tax year basis. The transition year is 2022/23.

For the transition year, the taxable profits for a business that does not have a 31 March/5 April year end will comprise the sum of:

  • the standard component (which is the profit assessable in 2022/23 under the current year basis); and
  • the transition component (which is the profit for the period from the end of the current year basis period to the end of the 2022/23 tax year).

Any historic overlap relief can be claimed in the transition year by deducting overlap profits from the result of the above calculation.

For example, if you prepare accounts to 30 June each year, for 2022/2023, you will be taxed on the profits for the year to 30 June 2022 (the basis period for 2022/23 under the current year basis) plus profits for the period from 1 July 2022 to 5 April 2023 (the transition component), less any overlap profits. The overlap relief will cover the period from the date on which the business started to the following 5 April.  

Spreading excess profits

In the transition year, your profits may be higher than normal. This will be the case if your transition component is more than your overlap relief. If you started your business some time ago, the impact of inflation may mean that your overlap profits are considerably less than the profits of the transition component, even if they both cover the same number of months. If your profits are higher than normal, your tax bill will also be higher, and you may pay tax at a higher marginal rate as a result.

To mitigate the effect of the transition year on cash flow, HMRC plan to allow businesses to elect to spread any excess profits in the transition year over five years.

Equivalence rules

As part of the simplification reforms, HMRC propose that the statutory rule which deems 31 March to be equivalent to 5 April in the first three years of a trade is extended so that it applies to all the years of the trade. This will mean that where accounts are prepared to 31 March, the business would not need to make small adjustments for the profits of the business to correspond to the tax year, which runs to 5 April. The consultation sought views on whether this equivalence rule should be extended to property businesses.  

We can help

Please talk to us about what the reforms will mean for your business, and what you need to do to prepare for the introduction of MTD ITSA.

September 6, 2021

MTD for corporation tax

MTD for corporation tax

The Government would like to hear your views on proposals for a new process for keeping records for corporation tax purposes and reporting tax information to HMRC, known as Making Tax Digital (MTD). Your comments will help ensure that the design makes it as easy as possible for smaller businesses to comply when the rules are introduced.

The consultation closes at 11.45pm on 5 March 2021.

March 2, 2021

Making Tax Digital – the next steps

Making Tax Digital – the next steps

On 21 July, the Treasury published a report, Building a trusted, modern tax administration system, which sets out the Government’s vision of what they wish to achieve in the next ten years. The vision comprises three elements – policy, systems and law and practice. The ‘policy’ vision means a progressive extension of HMRC’s Making Tax Digital (MTD) work, the ‘systems’ vision means exploring the appropriate timing and frequency for the payment of the different taxes and the technology infrastructure needed to support this, and the ‘law and practice’ vision means reform of the tax administration framework itself.

Extension of MTD

HMRC’s MTD programme is currently in the initial roll-out phase for VAT. Since April 2019, MTD for VAT (MTDfV) is mandatory for most VAT-registered traders whose VAT-taxable turnover is above the VAT registration threshold of £85,000. As a result of a recent Government announcement, the next phase will be to extend the scope of MTD to the VAT registered with turnover below £85,000 from April 2022 and then to introduce MTD for Income Tax for the self-employed and unincorporated landlords from April 2023.

MTD for VAT

MTDfV is compulsory for VAT-registered traders whose taxable turnover is above the VAT registration threshold of £85,000. Traders within its scope must maintain digital VAT records and file digital returns using MTD-compliant software. However, the requirement for digital links to be in place between all parts of process has been delayed by one year as a result of the COVID-19 pandemic and will now apply from the first VAT return period starting on or after 1 April 2021. A digital link is simply the transfer or exchange of information between software programmes without the need for manual input of data.

MTD for Income Tax

Businesses and landlords with annual business income chargeable to Income Tax of more than £10,000 will need to comply with MTD for Income Tax from the start of their first accounting period that starts on or after 6 April 2023. This will necessitate the keeping of digital records and the use of software to send in-year updates of their income and expenditure to HMRC, at least quarterly, instead of filing annual post year end information when submitting a self-assessment tax return.

In addition to the four ‘in-year’ updates, at the end of the accounting period the taxpayer will need to finalise their business income by filing a final adjusting submission and making a declaration that it combined with the earlier submissions is correct. The final declaration will replace the current self-assessment return filed after the end of the tax year.

More information about MTD for income tax can be found on the Gov.uk website.

MTD for Corporation Tax

HMRC are to consult later in 2020 on the design of the MTD system for Corporation Tax to ensure that the MTD process evolves to include limited companies.

Help and advice

We can help you prepare for and comply with MTD.

July 30, 2020

Making Tax Digital – soft landing extension

Making Tax Digital – soft landing extension

One-year extension for MTDfV soft landing

In a welcome response to COVID-19, HMRC has extended its digital links ‘soft landing period’ by twelve months to April 2021.

HMRC Email

In a widely distributed email issued on 30 March 2020, HMRC stated:

“We understand that the impact of COVID-19 is creating extremely difficult times for all, and we are committed to helping in every way possible all those businesses facing unprecedented challenges.

Therefore, we are providing all MTD businesses with more time to put in place digital links between all parts of their functional compatible software. This means that all businesses now have until their first VAT return period starting on or after 1 April 2021 to put digital links in place.”

Digital journey

From April 2019, once those mandated to comply with VAT MTD have entered accounting data into their business’s accounting software, they have been required to transfer, recapture or modify that data using digital links. Effectively, once VAT data has been digitally captured the rest of its journey until the submission of a VAT return must be a digital journey, without manual intervention.

Soft landing

HMRC recognised that not all businesses would have digital links in place from day one and allowed a period of grace, the ‘soft landing period’. HMRC promised that, where businesses were trying to meet the statutory digital end to end journey during the ‘soft landing period’, the department would not impose penalties for non-compliance.

The effect of the ‘soft landing’ announcement meant that for the first year of mandation, businesses are not required to have digital links between software programs.

For most, MTD for VAT rules have applied from VAT period starting on or after 1 April 2019. Although there was a smaller group where mandation was deferred until the start of the first VAT return period on or after 1 October 2020.

What it means

All businesses mandated to comply with MTD for VAT now have until their first VAT return period, starting on or after 1 April 2021, to put digital links in place.

Given the coronavirus related troubles affecting practically all businesses in the UK, this extension to the ‘soft-landing period’ is another sensible easement that is to be much welcomed.

April 16, 2020