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In self-assessment? Start preparing for Making Tax Digital

Making Tax Digital is on the near horizon, and business owners on self-assessment need to start preparing now, says Mike Blaken of Optimum Professional Services.

The government recently announced the introduction of Making Tax Digital for self-assessment would be delayed for a year.

Known as MTD for ITSA – Making Tax Digital for Income Tax Self-Assessment – the start date was due for April 2023, but this will now happen in 2024.

This 12-month postponement is good news, as it gives those affected more time to prepare, but – as we all know – time passes quickly and all too soon the new regime will be underway.

Experts in MTD say there will be no ‘soft landing’. Once it is introduced, anyone in self-assessment will be expected to immediately start filing quarterly returns, plus a fifth ‘mop up’ return.

To jump from one self-assessment return in a year to five is a big leap. Now is the time to get ready.

So what is MTD for ITSA? Many business owners, whose businesses are VAT registered, will already be familiar with Making Tax Digital.

The final wave of VAT registered businesses, including self-employed people and landlords, will be drawn into this system from April 2022, needing to provide their quarterly VAT returns through MTD compatible software.

MTD for ITSA will work in a similar way. People who are in the self-assessment system for income tax will need to keep records electronically and, again using MTD compatible software, file quarterly returns to HMRC with details of their income and expenditure.

A final statement must also be submitted after the tax year-end. This final declaration will be called EOPS, which is a year-end declaration and will be similar to the annual tax return.

All businesses which were in existence before April 6 2023 will join MTD for ITSA from April 6 2024.

General partnerships with business or property income, which only have individuals as partners, will join the system from 2025.

The joining date for all other partnerships (such as those with corporate partners and Limited Liability Partnerships) has not yet been announced.

2024 may seem a long way off, but it will take into account the 2022/23 tax return, which needs to be filed by January 31 2024.

This tax return will then indicate to HMRC whether or not you need to sign up to MTD for ITSA.

Those with annual income of less than £10,000 will be exempt. This relates to turnover and not profit and the £10,000 limit covers all sources of income. For example, if you have £5,000 rental income and £7,000 self-employed income you will fall into MTD for ITSA.

If you find you are drawn into Making Tax Digital for self-assessment, you then only have three months before ‘go live’ on April 6.

It may seem surprising that the £10,000 threshold is lower than the annual personal allowance threshold, currently £12,570, because it means a swathe of people will be expected to file quarterly returns even though there is no tax owing.

Also worth noting, if you have a number of separate businesses, you will need to file separate returns for each business. That could end up being a lot of tax returns.

Mike Blaken is accounts director at Optimum Professional Services in Swindon.

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