Income Tax MTD : What it means for sole traders in 2024

Making Tax Digital (MTD) is the UK governments flagship programme to make tax accounting easier for businesses and individuals such as sole traders. As you might guess from the name, it does this by legislating the digitalisation of tax data and submission.

Making Tax Digital for Income Tax

Self-employed businesses and landlords with annual business or property income above £10,000 will need to follow the rules for Making Tax Digital for Income Tax from 6th April 2024.

Some businesses and agents are already keeping digital records and providing updates to HMRC as part of a live pilot to test and develop the Making Tax Digital service for Income Tax. Suppose you are a self-employed business or landlord. In that case, you can voluntarily use software to keep business records digitally and send Income Tax updates to HMRC instead of filing a Self-Assessment tax return.

Helping businesses, self-employed people and landlords get it the right first time.

Most customers want to get their tax right, but the latest tax gap figures show that too many find this challenging, with avoidable mistakes costing the Exchequer £8.5 billion from 2018 to 2019. The improved accuracy that digital records provide, the help built into many software products and the fact that information is sent directly to HMRC from the digital records, avoiding transposition errors, will reduce the amount of tax lost to these avoidable errors.

As businesses become increasingly digital, the use of digital record-keeping tools helps prevent businesses from making errors. This addresses the part of the tax gap attributable to error and failure to take reasonable care by significantly reducing the opportunity to make some types of mistakes in tax returns, principally simple arithmetical and transposition errors.

The latest published tax gap figures showed that avoidable mistakes made by taxpayers cost the Exchequer more than £9.9 billion in lost revenue 2017-2018. By supporting businesses to get their tax right, MTD is designed to prevent these types of errors, reducing the tax gap, supporting public services, and levelling the playing field for businesses.

Exchequer impact (£m)

2020 to 2021 2021 to 2022 2022 to 2023 2023 to 2024 2024 to 2025 2025 to 2026
+20 +55 +210 +400

 

Transitional one-off costs could include some or all of the following:

  • time spent in familiarisation with the new MTD obligations (digital record keeping and quarterly submission of information)
  • in-house training
  • the purchase of new hardware or upgrading of existing hardware (expected to affect a small minority)
  • additional accountancy or agents’ costs

Alongside the costs of making the transition to MTD, significant, more comprehensive benefits and cost efficiencies are available for many businesses as part of going digital, once they have moved to digital record keeping, such as productivity and efficiency. Some, but not all, of these are measurable in cost terms. For businesses, these benefits may offset wholly, or in part, any costs of complying with MTD.

HMRC has been working with the software industry to ensure that businesses needing to update their accounting systems will access affordable software products. The government has committed to free software products for the smallest businesses with straightforward affairs.

MTD requirements for sole traders

  • Rental income from property you own contributes to this £10,000 threshold, too.
  • If you owned and operated four businesses, each with an income of £3,000, for example, you’d need to register for MTD for Income Tax and then follow its rules for all of them.
  • Similarly, if you received £5,000 income from your sole trader business and £6,000 from rental income on the property you own, you’ll need to use MTD for Income Tax.

For taxpayers who submit details via the MTD for Income Tax route and report all their income and allowable expenses, there will no longer be any need to send a Self-Assessment tax return

What are the MTD for Income Tax rules for sole traders?

The majority of sole traders whose business income is above £10,000 will be required to use compatible software for their income tax accounting for the first entire accounting period starting on or after 6th April 2024.

For taxpayers who submit details via MTD for the Income Tax route and report all their income and allowable expenses, there will no longer be any need to send a self-assessment tax return (outside of a minority of circumstances where other types of income or deductions need to be declared, in which case a self-assessment return may be required in addition the following MTD for the Income Tax rules).

Which sole traders are affected by MTD for Income Tax?

MTD impacts any sole trader with a taxable income of over £10,000 for Income Tax. This can be from any businesses they own or rent on property they own (or a combination of them).

Those whose business income is below this threshold or those who complete Self-Assessment for other reasons, such as for state benefits, pension income or saving interest- will probably see no changes.

Will a sole trader still be able to file paper Self-Assessment returns under MTD for Income Tax?

If your income is below £10,000, the MTD for Income Tax regulations won’t apply to you. You will likely be able to continue filing your Self-Assessment return in the same way as usual. While most businesses required to follow the MTD for Income Tax rules will have to use compatible software, some can apply to be digitally excluded. This is allowed because it’s either impossible or impractical for them to use technology in the way MTD requires.

Can a sole trader still handwrite or print invoices under MTD for Income Tax?

There’s no issue with creating paperwork in your business under MTD for Income Tax’s rules. The proviso is that the data will either have to already be in your digital accounting records (e.g., you’re printing an invoice for posting out from within your accounting software), or you’ll need to transfer the details to your digital accounting records soon as possible.

WIM Accountants are here to help businesses with their accounting and taxation needs.

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