Making Tax Digital – how will it impact you?
This Focus of this insight concentrates on the background of Making Tax Digital (MTD) and the impacts it may have.
What is Making Tax Digital (MTD)
Making Tax Digital (MTD) for self-employed individuals and landlords with income exceeding £50,000 will be introduced from April 2026 with the income threshold reducing to £30,000 in April 2027. This will represent the biggest change to the tax system since the introduction of Self-Assessment for the 1996/1997 tax year. Seeing a complete shift from annual reporting to quarterly reporting.
As an example, using a 31 March year end, quarterly reports would be required as follows:
|April – June
|July – September
|October – December
|January – March
|April – March
|31 January following year end
This is initially for individuals, but a date for general partnerships is yet to be announced.
Those with both self-employment income and property income will be required to combine the sources to determine if they exceed the £50,000/£30,000 threshold.
For example, an individual with both sources of income:
- Property income £18,000
- Self-Employment income £35,000
Total relevant income is £53,000, therefore this individual would fall within MTD from April 2026. At this time, only these sources would be reportable under MTD.
Under this proposal, there is no expectation of tax payments being demanded on a quarterly basis, rather than the current situation of half yearly (payments on account and balancing payments).
However, this change to reporting, once fully operational, does open up the possibility of the submissions being linked to the payments due, and it would not be surprising if this were to be the case in the future. After all, this then reduces the gap between profits being earnt and the tax being paid.
The example illustrated a 31 March year end, but what about those with alternative year ends? To bring the system into line with tax year reporting, the latest proposal from the Government looks to address this with a basis period reform.
At present unincorporated businesses are free to choose whatever accounting year-end they wish. These profits are then taxed according to the tax year in which the accounting year-end falls. When a business starts or a partner joins a partnership, the ‘opening year rules’ must be applied, this can create double taxation of some profits, called overlap profits. These overlap profits are then relieved on cessation of the trade or retirement of a partner.
From April 2023 HMRC will commence changes to tax all unincorporated businesses and LLPs on a tax year basis regardless of the accounting year-end.
For example, if a business has a 30 September 2023 year-end the taxable profits would be calculated for the 2023/24 tax year by taking the last six months of profits from the 30/9/23 year-end and the first six months of profits from the 30/9/24 year-end. If the 30/9/24 accounts have not been prepared prior to the submission date of the 23/24 tax return provisional figures should be used, and the tax return amended once the final figures are known.
HMRC recognised that during the 2023/24 tax year when the new rules are implemented, this could see taxpayers paying a significantly increased amount of tax as more than 12 months of profits may be brought into account. It will be possible to offset any overlap profits but, in many cases, these may be considerably lower than current year profits as they were created when the trade was commencing.
Where taxable profits exceed the current year’s profits excess profits can be spread over five years.