Making Tax Digital for Income tax
From April 2023 income tax will be made digital for certain businesses and landlords. Making Tax Digital or MTD has been running as a pilot program launched by the HMRC back in 2018, business owners that wished to test the initiative voluntarily elected to participate. But starting from 2023 all businesses that fit the criteria will need to prepare their income tax reporting electronically.
What is the criteria?
According to the HMRC website the specific criteria for MTD is :
“Self-employed businesses and landlords with annual business or property income above £10,000”
This applies to businesses or those receiving property income that have only individuals as partners. Corporate partnerships and limited companies are not currently required to report income tax digitally but will be required to do so in the future.
To take part in MTD, businesses will need to record their income and expenses and report them to the HMRC on a quarterly basis. A final end of year report will be required to confirm all of the figures submitted, and allowances or reliefs can be claimed at this time.
For those that prepare tax records on behalf of other businesses, such as accountants, specialized software packages will be required that permits the reporting of information to the HMRC.
Are there any exemptions?
There are some exemptions to the MTD program.
Those businesses whose income does not exceed £10000 per year will not be expected to submit their income tax information via MTD.
Nor will it be required for those that cannot feasibly use the system, such a people with disabilities, people in a remote location, or those that do not use electronic communications for religious beliefs.
Are there benefits to MTD?
While there may be a learning curve for some people, switching from a manual system to a digital system should make life easier in the long term. For those preparing tax returns, there will be no need to manage spreadsheets or keep hard copies of the information for years on end.
The use of MTD will be mandatory by 2023, but for companies that need to track information like bills and expenses, prepare invoices and quotes, or handle employee payroll, the ability to integrate income tax reporting into existing financial software can streamline the process and make reporting more efficient.
Generally speaking, going digital can mean easier bookkeeping, better accuracy in reporting, and leave companies with less paperwork to worry about.
Financial updates and tax reporting can be time-consuming, digital reporting should make the process faster and easier, and for those using dedicated financial software, this means that the financial health of the company can always be viewed in real-time. Allowing for better visibility to things like expenditure or revenue.
Being able to view finances at the click of a mouse button also means that income tax obligations can be planned for. Reducing the risk of receiving a large, unexpected tax bill at the end of the accounting period.
Filing quarterly returns using financial accounting software will also remove the need for self-assessment with reports and data being uploaded directly to HMRC by company accounting systems.
Mistakes and errors can be minimized with many software packages having the ability to perform a series of checks that highlight double-entries, errors, or erroneous data.
Conclusion
As MTD is rolled out to there will be a period of transition for most companies while the new technology is adopted, however, once this is complete businesses should realise a number of benefits and improvements from using the MTD system for monthly and annual income tax reporting.
