MTD for income tax: What you need to know

Written by

Parth Shah

The Making Tax Digital (MTD) move is widely regarded as an excellent decision that allows HMRC to audit businesses better while also reducing administrative costs.

As of 1st April 2019, businesses with taxable supplies higher than £85000 were to join MTD for VAT. It is also required for them to have digital links within their accounting records for VAT, a new rule that came into force on 1st April 2021.

As an accounting firm, you will likely get multiple questions about MTD from clients anxious to be on the right side of the law. Here is all you need to know.

Which businesses does the MTD rule apply to?

According to the new rules, all VAT-registered businesses need to join MTD for their first VAT return after April 2022. Exceptions include companies that:

  • Are currently subject to insolvency
  • Are run entirely by people whose beliefs or religious practices forbid them from keeping electronic records or using electronic communications
  • Are not practically able to use digital records owing to age, disability, remote location, or other valid reasons

These exclusions will also apply to MTD for income tax.

What are the rules on MTD for income tax?

It has been announced that the MTD rollout will affect income tax from 6th April 2023. All businesses and landlords with a gross income of more than £10,000 will be affected by this, which means that from 6th April 2023, they will all need to keep digital records.

The exception is for businesses with a year-end on 31st March, who will not come within MTD until the new accounting period on 1st April 2024. This will be a significant change for businesses and landlords, many of whom might not have been in the habit of keeping digital records.

It also implies that they will have to regularly update their books of account, rather than keeping everything until the last minute, just before tax return season. However, paper copies of receipts will still be acceptable.

It is expected that the regulations with all the detailed requirements will be finalised by summer 2021. Accountants should keep the new regulations in mind and start migrating their clients to digital records to avoid extra work piling up in 2023.

Plus, with the help of real-time accounting, even the smallest of changes in tax information or books of accounts can instantly reflect everywhere, thus making your job easier.

How to get started on moving your clients to MTD

For each of your clients eligible for MTD, you will need to consider the kind of software most appropriate for you and them. Factors to take into account include:

  • What the client’s current bookkeeping arrangements look like
  • How comfortable your client is with technology
  • The monthly cost of the technology to your client and you
  • The complexity of the client’s business
  • How much of the work you will be doing in-house, and what you plan to charge for it
  • Whether you plan to use a photo capture software for paper documents along with your bookkeeping software

For clients who are already using spreadsheets for their books of accounts, you might want to continue that way for a while before moving them to more advanced options.

You will also need a bridging software option for quarterly submissions if your client’s records are on spreadsheets. Even if you are outsourcing MTD support, technology will play a key role.

How much minimum detail will the HMRC be looking for?

HMRC will likely expect at least a quarterly updation of books of accounts, with a preference for updating them as much in real-time as possible. They are likely to expect records in as much detail as it takes to correctly identify sales invoices and expenditure receipts.

For retailers, as an example, this will likely translate into daily till totals rather than every individual transaction.

Businesses are likely to have their books assessed based on the categories mentioned on the self-assessment return, such as cost of goods bought for resale, wages and salaries, irrecoverable debts written off, rent and rates, office costs, and entertainment expenses.

Landlords will be required to do so in line with current tax return entries, such as rent income, rates, and insurance, property repairs, loan interest, legal and management fees, and so on.

If you are using spreadsheets, you need to keep the requisite amount of detail in mind. Current accounting software primarily does not cater to landlords, which means that we are likely to see the development of landlord-specific software over the next year or so.

Prepare your clients for MTD

In this context, it is essential to mention the role of bank feeds and open banking. Setting up your client’s bank feed into the accounting software means that data gets updated regularly, helping you perform accurate analysis without the trouble of having to track down each entry.

If your client uses spreadsheets, you can ask them to periodically down their bank transaction records for their analysis. But before you jump into things, we would advise you to sit with your clients and understand how much they know about MTD. Education plays a key role in MTD’s implementation.

But working with clients to get their records recorded digitally and updated periodically comes with its unique challenges. It brings an extra workload you simply might not have the time for. In that case, do reach out to MTD experts at Stellaripe.

From doing end-to-end digital record-keeping to compiling and submitting monthly/quarterly VAT returns to providing periodic business summary and reporting, we will do it all for you and more. Please arrange for a consultation with us to know more.

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