How Does MTD For Income Tax Work?

What is Making Tax Digital (MTD) for Income Tax?

Unless you work in full time employment and all your income is already subject to tax under the Pay As Your Earn (PAYE) scheme, then it is likely that you will need to submit a Self-Assessment personal tax return each year!

This includes those who:

• Are self-employed and earn more than £1,000 in revenue
• Are a Partner in a business
• Have disposed of something that gives rise to Capital Gains Tax
• Pay the High-Income Child Benefit Charge
• Have any other untaxed income, such as:
  • Money from renting out a property
  • Tips and commission
  • Income from savings, investments, and dividends
  • Foreign income

However, with the continued advancements in technology which support businesses from an Accountancy and Tax perspective, HMRC are now keen for “some of the people” who submit a tax return to also provide additional disclosures throughout the year.

Making Tax Digital (MTD) is therefore an extension of the process HMRC previously implemented for VAT (many years ago), and will require taxpayers to make additional periodic (e.g. quarterly) submissions to HMRC for income tax.

Who Will Be Impacted?

Not everyone who submits a tax return will be impacted by the new rules (at least not at the current time).

You will need to use MTD if ALL of the following apply:

• You are registered for Self-Assessment
• You receive income from self-employment, or property, or both
• You have “qualifying income” of more than £20,000

And the date by which the rules start to apply to you depends on the value of your “qualifying income” (QI).  For instance:

• If QI > £50,000 – Start applying the rules from 6^th April 2026
• If QI > £30,000 – Start applying the rules from 6^th April 2027
• If QI > £20,000 – Start applying the rules from 6^th April 2028

What is Qualifying Income?

There are a number of rules which examine what is included in Qualifying Income and vice versa, and these can be viewed HERE.

However, in very simple terms your qualifying income is the total INCOME you get in a tax year from SELF-EMPLOYMENT and PROPERTY.  Other forms of income, such as other employment income, or dividends can be ignored for these purposes.

Furthermore, it is the submission of a self-assessment return for a business for the previous year that triggers MTD.  So new businesses don’t have to follow the rules until a tax return has already been submitted that includes income for that business (or income source).

This is because HMRC will use your prior year self-assessment tax return to estimate the value of qualifying income for your business for the next year.

What Software Do I Need to Use?

HMRC maintain a list of software that can support MTD for income tax.  In practice though the vast majority of “mainstream” Accountancy and Tax software has now been updated to support MTD.

Key requirements include the ability to:

• Store electronic copies of documents as evidence for business income and expenditure.
• Submit:
  • Periodic (quarterly or monthly) reporting to HMRC
  • Your annual self-assessment tax return to HMRC
• Support the reporting period of your business, depending on whether this is based on
  • Tax Year Reporting – This runs from the 6^th April to the following 5^th
  • Calendar Year Reporting – In earlier years, this could have been any 12-month period. However, following “Basis Period Reform” this only now applies to businesses who have chosen to use 1^st April to the following 31^st March as their accounting year.

How Do I Sign-Up?

Providing that you are already registered for self-assessment, you can sign-up to the scheme yourself HERE, or your Accountant can sign-up on your behalf.

In order to do this, you will need to provide the following information:

• National Insurance Number
• Business start date, or the date you started receiving property income (if this is within the last 2 tax years)
• Accounting Method Used – E.g. cash basis vs traditional accruals basis
• Tax year you will start using MTD

If you are self-employed sole trader, you’ll also need the following information:

• Business Name
• Business Address
• The Trade – The nature of your business

Note – If you have multiple income sources, you’ll need to sign up each one for MTD separately.

What Do I Need to Do Next?

Similar to accounting for VAT the most important thing to do with respect to MTD for Income Tax is to keep your accounting records up to date throughout the year.  And if you don’t have time to do this yourself, then it is definitely essential to hire an accountant to help you do this!

This is because you will now need to provide financial reporting to HMRC on a quarterly basis, and therefore you shouldn’t wait until the end of the year to do your accounts, because if you do this then the quarterly reports you send to HMRC will not be accurate.

Similar to VAT the deadline for submitting these reports is 1 month and 7 days after the end of the reporting quarter.  Therefore, the following submission deadlines for sending quarterly reports to HMRC will now apply:

• April – June Quarter – 7^th August deadline
• July – September Quarter – 7^th November deadline
• October – December Quarter – 7^th February deadline
• January – March Quarter – 7^th May deadline

Although you can optionally also make submissions more frequently (e.g. monthly) if preferred.

You will also need to continue to submit your self-assessment personal tax return before the 31^st January deadline after the end of the tax year.

When Do I Have To Pay Tax?

While MTD now requires you to produce and file additional quarterly reports, the payment deadlines for tax do NOT change (at least not at the current time).

Therefore, the normal payment rules for self-assessment still apply, which are:

• The Payment Deadline for the PREVIOUS tax year is always the following 31^st
• Furthermore, where the tax you paid in the previous tax year is more than £1,000, you also need to make advance payments towards your bill for the current tax year (known as “Payment On Account” or POAs). You therefore need to make the following additional payments:
  • 31^st January (during the tax year) – You pay an estimate of half the current year’s tax (being half the tax you paid last year).
  • 31st July (after the tax year) – You pay the same again in July (i.e. half the tax you paid last year).
  • 31^st January (after the tax year) – After your self-assessment tax return has been submitted the difference between the estimated tax you have already paid, and the actual tax which is due is then payable by you, or refunded to you.

Can QAccounting Help Me?

Yes, we aim to be the UK’s Premier Online Accountancy and Tax Accountant, and we are here to help you every step of the way, whether you need to understand the rules in greater detail or need advice about next best steps.

Please give us a call, email us, or contact us ONLINE to speak to a member of our Accounting team without delay!

Author: George Ian Hope BAcc(Hons), MSc(IT), FCCA, CGA, CPA

Managing Director – QAccounting Limited (www.qaccounting.com )

https://www.linkedin.com/in/gihope

Ian is a general practicing member of the Association of Chartered Certified Accountants with fellowship status (FCCA). He is also a member of the Certified General Accountants Association of Canada (CGA), and a member of Chartered Professional Accountants of Canada (CPA).

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