If you’re a sole trader or a landlord, the way that you pay your tax is going to change. Making Tax Digital (MTD) has been slowly rolled out to businesses, and over the next two years, those who are self-employed will be expected to submit their tax returns differently.
What is Making Tax Digital?
Making Tax Digital was a proposal put forward by the Conservative government in 2015, and continued by the Labour government, aimed at modernising the way businesses manage their taxes and reduce errors in tax returns. This mandated change will require that accounting, finances and tax for businesses in the UK is managed digitally.
Making Tax Digital was implemented for VAT-registered businesses in 2019. In 2022, the government announced that businesses, self-employed individuals and landlords earning over £50,000, would be required to move to Making Tax Digital from April 2026. Businesses, self-employed individuals and landlords earning over £30,000 would be required to move to Making Tax Digital from April 2027.
What does this mean for sole traders, landlords and those who are self-employed?
Currently, sole traders, landlords and those who are self-employed submit their Income Tax Self Assessment (ITSA) and their expenses at the end of the tax year. They are then expected to pay tax based on this figure periodically throughout the year.
When Making Tax Digital is introduced, sole traders, landlords and those who are self-employed will be required to keep digitised records, submit digital quarterly updates and provide their Income Tax Self Assessment return information to HMRC through Making Tax Digital compatible software.
For those who have managed their own finances, through paper records or spreadsheets, this is a significant change. Businesses will need to find and purchase appropriate software, and learn how to make this software work for their business. This could be particularly difficult for those who are not technologically literate, struggle to use digital tools or do not have access to a computer or mobile device.
Considering the extent of this change for businesses, we expect more information to be released and communicated over the course of the next tax year.
What should businesses do now?
Businesses that currently have a qualifying income of £50,000, or expect that their qualifying income for the upcoming tax year will be at least £50,000, should consider their options over the following 12 months. Businesses that currently have a qualifying income of £30,000 have a little more time; however, you’ll still be required to move to digitised records in 2027.
There are a number of different software options available for businesses to digitise their financial records. Some of these are available for free; the majority use a subscription model meaning you will have to pay monthly to use the service.
Depending on who you bank with, you may be able to use Making Tax Digital compatible software for free with your business bank account. Banks should be aware of the upcoming changes and are likely to be able to offer some advice to businesses considering their software options.
You might also consider getting an accountant. Accountants should also be aware of the upcoming changes to tax for sole traders, landlords and those who are self-employed; however, make sure that they understand how Making Tax Digital will affect things for you.
There is software available for those with cognitive, visual, motor or hearing difficulties, and for those who already use assistive technology and send their information electronically, the government states that ‘MTD should not impose additional costs to meet their accessibility needs’. The government has also stated that there will be support available for people who need a little extra help, including agents, third party software, telephone support and web chat.
These changes may feel intimidating and overwhelming, but businesses do have time to think about how to move to Making Tax Digital. Those who are self-employed, sole traders and landlords should use the next 12 months to their advantage, and plan for this transition carefully.
