Making Tax Digital for VAT

Making Tax Digital (MTD) for VAT (Value Added Tax) is now compulsory for all VAT registered businesses as of 1 April 2022. Records will need to be kept digitally and a software used to submit VAT returns. If you have not yet registered for Making Tax Digital for VAT or set up on a software, please contact us as soon as possible.

Making Tax Digital for Income Tax (MTD for ITSA)

As of 6 April 2024, if as an individual you have trading or property income before expenses of more than £10,000 (either combined or generated on an individual business basis) you will be required to submit quarterly returns to HM Revenue and Customs via an MTD for ITSA compliant software. General partnerships (a partnership with individuals as partners) will not be required to join MTD for ITSA until April 2025. If your income from trading or property is less than £10,000 you will have the option to continue with the existing Self-Assessment system.

Any new businesses who exceed the £10,000 turnover threshold for the first time will be required to comply with MTD for ITSA from 6 April in year three, e.g. if your business first exceeds the turnover threshold in 2025/26, you are required to comply from 6 April 2027.

Under MTD for ITSA you will be required to make four quarterly submissions followed by an End of Period Statement (EOPS). Following the end of the tax year you will then have until 31 January to submit a final declaration for all your income which is equivalent to the Self-Assessment tax return. This may seem like a lot of submissions however compatible software will automate many of these submissions for you.

HM Revenue and Customs has been working with software providers to ensure that the software will be available to all businesses and many of the providers are already trialling their MTD for ITSA package to ensure that they will be compatible when the legislation changes in April 2024. It is expected that most of the software packages that are available to purchase now will be compliant so for many businesses already using a software. Owing to this, it is unlikely that you will have to change the software you are using.

For traders who are already VAT registered and compliant with Making Tax Digital for VAT it is unlikely you are going to be required to make any changes to your record keeping system for MTD for ITSA. However, traders or landlords who have income of more than £10,000 you will need to ensure that you are maintaining your records digitally and the start of the next tax year (April 2023) may be the best time to consider using a software to maintain your records so that you are prepared for the new MTD for ITSA legislation.

The quarterly submissions which you are required to make will follow the tax year (6 April to 5 April) rather than your accounting year end of the business. These quarterly submissions will not consider the year end adjustments which will be required, e.g. stock in hand and capital allowances. The quarters will be in line with the tax year and will be the following periods:

Alternatively, you may make an election for a business in respect of a tax year, ‘a calendar quarters election’ which will allow a business to draw up quarterly updates to the end of the previous month. This will affect the quarter periods as follows:

The End of Period Statement (EOPS) will include the adjustments that are required to your trading and property income, this statement will include any accounting adjustments and claim any reliefs. You will also be confirming that the information submitted is accurate and complete. The EOPS deadline for submission is the 31 January after the end of the tax year.

The final declaration replaces the Self-Assessment tax return and will also need to be submitted by 31 January after the end of the tax year. This final declaration will include any personal income such as dividends and interest and will also calculate the amount of tax which is payable. The tax which be due for payment by 31 January as it is with the current Self-Assessment system.

Abolishment of Basis Periods and Transitional Period

With the introduction of the MTD for ITSA legislation basis periods will be abolished and all income will be required to be reported on a tax year basis. If your business is currently not trading with a year end which is in line with the tax year (either 31 March or 5 April) you will be required to make apportionments to cover the tax year. Although businesses remain free to choose any period of account.

HM Revenue and Customs have announced a transition year in 2023/24 for those who are required to change their basis periods. In this transition period 2023/24 this basis period will consider of the 12 months from the end of the basis period in 2022/23 plus the transitional period from that point to 5 April 2024 less any overlap relief available.

A trader may make an election to assess the transitional period over five tax years to spread the potentially additional income tax payable on the transition. In each of the four tax years beginning with 2023/24, an amount equal to 20% of the amount of the transition profits is treated as arising and chargeable to income tax. In the fifth tax year, the balance of the transition profits is treated as arising and chargeable to income tax.

If the deduction of the overlap profits in the transition year creates a loss for the trader, then terminal trade loss relief apply as if you had permanently ceased to trade on 5 April 2024. Terminal loss relief allows losses to be set against trading profits of the current and earlier three tax years.

Making Tax Digital for Corporation Tax

Making Tax Digital for Corporation Tax is expected to be introduced in the future however it is not expected to be a requirement before 2026.

Written by Alice Chapple FCCA ACIPP

Alice Chapple FCCA ACIPP

Senior Manager

Alice joined Evolution ABS in July 2013 after completing her A Levels at the Woodroffe School. She has completed her AAT with Richard Huish College, and was nominated for higher apprentice of the year in Somerset and finished in the top 3. Alice became a fully qualified Chartered Certified accountant in May 2018, and has since completed her Payroll Technician Certificate and oversees our payroll department.

In her spare time, she is an active member of Axminster Young Farmers, and enjoys being in the countryside and walking her two dogs. She also enjoys helping her family and her husband on their dairy farms in East Devon.

T: 01823 462908

E: alice.chapple@evolutionabs.co.uk