July 30th, 2020 / Insight posted in Articles

MTD for self-employed individuals and small companies

HMRC has an ambitious project to make the filing of tax returns a digital process. Broadly, this will mean that relevant accounting information is uploaded directly from a business’s or an individual’s accounting software.

As HMRC has said, “HMRC’s ambition is to become one of the most digitally advanced tax administrations in the world. Making Tax Digital (MTD) is making fundamental changes to the way the tax system works – transforming tax administration so that it is:

  • more effective
  • more efficient
  • easier for taxpayers to get their tax right”.

Significant doubts have been expressed by businesses and professional advisers alike as to whether the purported benefits will be achieved.

To date, MTD has been restricted to VAT and is only mandatory for businesses with a taxable turnover above the VAT threshold, currently £85,000. It is voluntary for smaller business but is to become mandatory for all businesses for the first VAT return starting on or after April 2022.

Many businesses will be over the VAT threshold and will already be within the MTD regime, so the impact will be minimal. Self-employed individuals or very small companies who are below the threshold, but have voluntarily registered for VAT, will need to comply from the above date. They will need to ensure that they have in place accounting software that facilitates MTD reporting.

HMRC has maintained that the cost of transitioning to MTD for VAT would be about £109 per taxpayer. However, surveys of real costs incurred have indicated that it is much higher than that. In particular, cost as a proportion of turnover is likely to be higher for smaller businesses.

Although widening MTD to other taxes has been deferred, HMRC has now announced that small self-employed businesses and landlords with turnover in excess of £10,000 a year will have to report via MTD for income tax purposes. This will apply to their first accounting period starting on or after 6 April 2023. This will affect freelancers and other individuals operating in the design sector either as sole traders, partnerships or LLPs.

There is a view that widening the scope of MTD at a time when most businesses are trying to cope with the current financial climate is unreasonable. However, unless the government is forced to delay this, smaller business will need to invest in what is needed to make them MTD-compliant. With this in mind, it is recommended not to leave this to the last moment.