Why Your Should Prepare for MTD For Income Tax For 2021
There are a series of incoming tax changes that will impact how sole traders, the self-employed and landlords file their tax returns to HMRC. And while these individuals have until January 2023 to implement these changes as part of MTD for Income Tax, the longer they leave it, the harder it will be to adjust.
But don’t just take our word for it. Below, GoSimpleTax’s Mike Parkes sets the record straight on what you need to do to prepare yourself.
What is MTD?
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, you’ll 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, you’ll be required to send four quarterly updates, an end-of-period statement, and a final declaration to HMRC. But don’t worry, as you’re now using software, you’ll end up spending less time on admin under this legislation than you did previously.
What are quarterly updates?
At least every three months, you’ll need to send HMRC a statement of your business income and expenses. The same is true for any property income that you earn. This allows HMRC to present you with a more up-to-date forecast on how much tax you’ll owe.
Again, your 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 your accounting period or tax year) will involve a similar process to the current one for Self Assessment tax returns.
As for your final declaration, this is where you confirm that the figures submitted to HMRC are final and correct. This submission will then be used as the basis to calculate any tax you 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 you leave it too late to sign up for approved software, 2023 could be a bit of a nightmare year.
Not only would you need to submit your 2021/22 tax return by 31st January 2023 as normal, you’d also then have to quickly get up to speed with MTD for Income Tax before your 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 with digital tax return software as soon as possible. By beginning to log your 2021/22 income and expenditure as and when they occur, you can 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 won’t have to worry about the 31st January 2023 filing deadline, freeing you 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.
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This content was created on April 23rd 2021
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