Making Tax Digital - How It Impacts Sole Traders and Income Tax Assessment From 2024

Making Tax Digital, often known as MTD, is one of the government’s statement policies that it has ushered in. As a programme that is intended to make it easier for sole traders and businesses to get their tax right, MTD works by allowing the digitalisation of data, and providing an electronic means of submission.

The next phase of the flagship project will come into force from 2024. This will see sole traders obliged to use MTD-compliant software in order to submit their returns.

This step of the project is known as MTD for ITSA - Making Tax Digital for Income Tax Self Assessment. The idea is not to make life harder for sole traders, but to provide the means to make submissions and keeping accounts more efficient.

If you are a sole trader, you will need to be aware of the impending change and what it will mean for you.

What Exactly is MTD for ITSA?

The legislation will come into effect on 6 April 2024, and everyone affected will be compelled to follow it. Opting to continue doing your accounts any other way simply will not be viable.

You are probably very familiar with electronic submissions but MTS for ITSA goes much further. Sole traders will be expected to use software that is compliant, and this will apply to their ongoing accounting rather than just the final submission.

It may sound onerous, but the government insists that eventually it will wipe out the need to do a painstaking annual return every year.

Not all the final details are yet known but based on the pilot and the draft legislation, here is what we do know.

Digital records

Any business or landlord that is covered by MTS for ITSA will be compelled to keep digital records on compliant software. If you do not have access to this now you will either need to buy access or use a free version or use an accountant’s software.

A lot of work has been ongoing between tech companies and HMRC to ensure that there are software solutions which are accessible and affordable.

The government has also committed to free software being available to businesses with very simple accounts.

Changes to self-assessment

Currently, annual filing of reports is required. Under the new system, sole traders and businesses would be required to submit quarterly reports. More frequent updates can be submitted, if preferred. A final statement would then also be filed once per year in January.

This is significantly more reporting than is currently required but the government insists that it will mean less paperwork. This is because the programme will do much of the work via automation. In theory, you should be doing far less than you are now, despite the more frequent filing dates.

At the end of the tax year, you will be required to crystallise your returns by checking through all the information you have provided, and the estimate calculated by HMRC. You will then need to confirm this information and submit it formally as an official agreement that you are willing to accept HMRC’s calculation of your tax liability.

This crystallisation is different from the end of statement requirements. This is a return that must be made at the end of the tax year and relates to each individual business. If you have more than one business, you will need to submit a separate end of year statement for each business.

The final statement that you return officially to HMRC will contain both the end of year statement plus any further financial assets such as dividends or interest.

Will You Be Affected by MTD for ITSA?

MTD for ITSA is not a voluntary scheme; everyone who meets the criteria is compelled to use it from the date it is launched. This means there is no way of opting out of the scheme just because it does not suit you.

Initially MTD for ITSA will apply to any sole trader business which makes more than £10,000 per year. This is the total gross income or sales, not net profit, and applies across all the businesses you own (if you have more than one). It also includes rental income if you are a landlord. Ultimately the scheme will expand to include other businesses, such as partnerships.

If your income does not exceed the £10,000 threshold you have the option of continuing to use the old system, but you can still switch to MTD for ITSA if you prefer.

There are a few select exemptions for those earning more than £10,000 which includes:

• Any business which is run by members of a religion where electronics are against their beliefs
• You are going through insolvency
• You meet the criteria for being “digitally excluded” (due to reasons such as remote location, disability, age etc)

If you want to claim an exemption you will need to apply directly to HMRC and they will have 28 days to make a decision.

New businesses will not have to use MTD for ITSA until the third year of trading, under the current rules. Likewise, if your business income drops below £10,000 you cannot be removed from MTD for ITSA until this level of income has been sustained for three years.

Start Preparing Now

The sooner you start to prepare for digitisation, the easier the transition will be. There might be considerable changes required if you do not use an accountant or accounting software, and starting to make the switch sooner will allow a period of transition before it is legally compulsory.

You can still continue to create paperwork for your business, if that is how you work, but all of the data must be stored electronically in compliant software. Using a spreadsheet is likely to be considered as problematic because it is easy to accidentally wipe all the data. Experts have warned that holding historic MTD data in a spreadsheet could result in a fine in the future.

If you already use cloud accounting software, it is likely to be updated to become compliant in time for the 6th April 2024 launch. However, if you use desktop software or spreadsheets, you may well need to find new software that is compliant. For our clients, we will notify everyone of our recommended solution and who is affected well in advanced of the deadline.

This may represent a big change from how you currently work, but MTD for ITSA is designed to include smaller businesses with simple structures. Therefore, once everything is set up and reporting, the system shouldn’t be an administrative hassle to run.