Making Tax Digital for Income Tax Self-Assessment – Everything you Need to Know and 5 Things you Need to Do

Making Tax Digital for Income Tax Self-Assessment – Everything you Need to Know and 5 Things you Need to Do

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Making Tax Digital for Income Tax Self-Assessment is set to come into effect from 6 April 2024.

If you have income from a sole trade, a partnership or from property, or a combination of these, then this will impact you if your turnover is greater than £10,000 per annum.

There’s a lot of information here, so this is longer than my usual blog, but this is important as you need to know what your responsibilities will be.

Actions you will need to take for Making Tax Digital for Income Tax Self-Assessment

These are the 5 things you need to do for Making Tax Digital for Income Tax Self-Assessment:

  1. Keep digital records of all business income and expenditure.
  2. Sign up for a new Making Tax Digital for Income Tax Self-Assessment account with HMRC before 6 April 2024
  3. Update HMRC at least every three months with a summary of income and expenditure using compatible software.
  4. At the end of your accounting period, finalise any profit and loss position via an end of period statement (or EOPS as it will be known). This is where you will be able to make any adjustments for allowances and reliefs.
  5. The final declaration effectively brings together everything done above into one final declaration which must be submitted by 31 January in the following year. It is this final declaration which will confirm to HMRC your tax liability. You will no longer need to submit an annual self-assessment return.

You will need to sign up for Making Tax Digital if:

  • You are registered for self-assessment
  • You get income from self-employment or property
  • Your total qualifying income is more than £10k

Qualifying Income for Making Tax Digital

Qualifying income is your income before you deduct expenses; turnover not profit.

All of your qualifying income must be reported through Making Tax Digital compatible software.

Any other income, such as employment, dividends or savings income will need to be reported separately. Either through Making Tax Digital compatible software (if it can do this) or your HMRC online services account.

For example:

£5K from rental income

£7K from self employed income

£12K total qualifying income

Conditions that need to be met for signing up to Making Tax Digital

Here are the requirements that need to be met:

  1. The 2022/23 tax return must be submitted by 31/1/24.
  2. Tax return will be reviewed by HMRC and if the qualifying income is above £10K HMRC will write to you by 6/4/24.
  1. Adopt the Making Tax Digital software and sign up for Making Tax Digital for Income Tax Self-Assessment.

Information needed before sign up to Making Tax Digital

  • Business name
  • Business start date
  • Email address
  • National Insurance Number
  • Accounting period
  • Accounting type (cash or standard)

You must be registered to file self assessment returns and have a Government Gateway ID and password.

Making Tax Digital Compatible Software

You need to use software that works with Making Tax Digital for Income Tax. The software must allow you to:

  • create and store digital records of each of your business transactions
  • send updates of the totals of your business income and expenses every 3 months
  • confirm end of period statements

You will also need to make your final declaration. This will be possible either through your compatible software or your HMRC online services account.

If you have more than one business

If you have more than one business (for example, if you are a landlord and a builder), you must meet the requirements for each business.

This means you must keep separate records and make separate submissions for each business.

Authorise your agent to meet the requirements

You can authorise HMRC to exchange data with your agent for any Making Tax Digital service. Once authorised, your agent can:

  • sign up your business
  • use software to create and store digital records on your behalf
  • use software to view, edit and send your data to HMRC

If you’ve previously authorised an agent to act on your behalf, you will not need to re-authorise them for Making Tax Digital for Income Tax.

Keep digital records using software

You must use compatible software to keep digital records of all your business income and expenses.

Using the software, you should create records of your transactions:

  • as close to the date of the transaction as possible
  • before you send the quarterly update for that period
  • no later than the quarterly deadline

Authorise your software

You need to authorise your compatible software by entering your Government Gateway user ID and password into your software and following the instructions.

You must use the user ID you got when you signed up for either:

  • self assessment
  • an agent services account

Send quarterly updates

Every 3 months, your compatible software will add together your digital records to create totals for each income and expense category. These summaries are known as quarterly updates.

You do not need to make any accounting or tax adjustments before sending an update, but you can if you would like your estimated tax bill to be more accurate.

When should you send your updates?

After your compatible software is authorised, you need to send updates for each income source to HMRC every 3 months.

You must send a quarterly update within one month of the end of the standard quarterly period. If you do not send it by this deadline, you may need to pay a penalty.

Use calendar quarterly period dates

At a later date, you will be able to choose to use calendar quarters instead of quarters ending on the 5th day of the month. HMRC will tell you how you can do this when it is available.

Calendar quarterly periods and deadlines are given in the following table.

Quarterly period

Quarterly deadline

1 April to 30 June

5 August

1 July to 30 September

5 November

1 October to 31 December

5 February

1 January to 31 March

5 May

If you notice an error in your digital records

You should update your records as soon as possible if you notice that you:

  • made a mistake when creating a previous digital record, such as accidentally duplicating a transaction
  • forgot to record an expense or a sales receipt

This will either be when you send your next quarterly update or when you confirm an end of period statement.

To update your records, you should change, delete or create a record, so the transaction is recorded correctly in the quarterly period in which it took place.

Your software will ask you to re-send the relevant quarterly update. When you have sent it, the new quarterly update will overwrite the previous one.

Finalise your business income

At the end of a tax year, the information you have sent in your quarterly updates will be combined together to show your income and expenses for the tax year.

You must have sent HMRC quarterly updates for each quarterly period before you can confirm an end of period statement.

If you have multiple businesses, you need to confirm an end of period statement for each business.

Before confirming the statement, you may need to:

  • make accounting adjustments
  • make tax adjustments
  • claim reliefs or allowances

These adjustments will amend the data that you have sent through your quarterly updates.

When you confirm an end of period statement, you will be declaring that:

  • the information you have provided for that business is correct and complete
  • you have finalised your tax position for that business, for the tax year

After submitting an end of period statement, you will be able to see an updated estimate of your tax bill.

Steps to take as an accountant

As an accountant, the way you work with your clients will change. Here are the basic steps you will need to take.

  1. Segment your client base:
  • Which clients are going to be included under Making Tax Digital?
  • Keep landlords separately
     2. Breakdown list into:
  • Easy to convert or already using a system that will be compatible
  • Clients who’ll need more support and guidance
  • Clients who’ll need extra help with moving to software and getting organised 
     3. Choose the software you’re going to use to cover the extra work of Making Tax Digital for Income Tax Self-Assessment. Take your time to get the best software for you and your practice. Research, trial and train staff on the new software.
     4. Explain to your clients the benefits of going digital.

Steps to take as a business

Here are the steps you need to take now:

  1. Set up a separate bank account for all business transactions
  2. Choose the software you’re going to use
  3. Keep digital records of all business income and expenditure.
  4. Sign up for a new Making Tax Digital for Income Tax Self-Assessment account with HMRC before 6 April 2024

Benefits of Making Tax Digital for businesses

The transition to digital record keeping will feel much easier if you look at the benefits rather than getting fed up that you have to do it. Concentrate on all the efficiencies for your business:

  • More control of business finances
  • Save time managing finances
  • Ability to track income and expenditure more accurately

Benefits of Making Tax Digital for accountants and bookkeepers

Because the figures will be up to date you will be able to advise your clients more easily. Real time information will mean you are more useful to your client.

Quarterly reporting means you’ll be communicating with your client more regularly. This will lead to a deepening of the relationships you have with your clients.

Possible solution to Making Tax Digital for Income Tax Self-Assessment for you

Some businesses, especially if they are not VAT registered, may not want to have the extra work of submitting their returns quarterly.  A possible solution to this is to go limited.  If you are not VAT registered, you won’t have to file quarterly and you will have the benefits of being limited.  The accountancy costs are likely to be similar to being a Soletrader as we move towards Making Tax Digital for Income Tax Self-Assessment as these will increase due to accounts having to be submitted five times instead of once. 

The downside to going limited is that from 1 April 2023, the Corporation Tax main rate for profits will be increased to 25% if your profits are over £250,000. Businesses with profits of £50,000 or less will continue to pay Corporation Tax at 19%. Companies with profits between £50,000 and £250,000 will pay tax at 25% reduced by a marginal relief. Hence going limited is still a possible solution if your profits are £50k or lower. Always decisions, aren’t there!

Making Tax Digital is going to happen so start planning now so that you have everything in place. See it as a good opportunity for you to make your business more efficient.  If I can be of any assistance, as I understand it can all be a bit overwhelming, then please get in touch.