Making Tax Digital for Income Tax: what sole traders and landlords need to know

What is Making Tax Digital for Income Tax?

Making Tax Digital, often shortened to MTD, is HMRC’s programme for moving tax records and reporting online. It already applies to VAT. The Income Tax version covers self-employment and property income.

Under it, you keep your business records in software rather than on paper. The software sends HMRC a summary of your income and expenses during the year. At the end of the year you confirm your final figures.

It changes how you report, not how your profit is taxed. The rules on allowable expenses and the rates of tax stay separate from MTD.

Who has to use it, and from when?

HMRC says MTD for Income Tax applies to sole traders and landlords registered for Self Assessment whose qualifying income is above a set threshold. Its page on whether and when you need to use it sets out the current position.

The threshold is being lowered in phases, so more people join over time. The start dates and income levels for each phase are [VERIFY WITH HMRC / ADAM].

Qualifying income is broadly your self-employment and property income before expenses. Other income, such as a salary from a job, is treated differently [VERIFY WITH HMRC / ADAM]. Some people can apply for an exemption, depending on their circumstances.

What actually changes compared with today?

Most sole traders and landlords currently keep records in any form they like and file one Self Assessment return a year. MTD adds structure during the year. The table compares the two, with figures left to HMRC’s current guidance.

What are quarterly updates?

A quarterly update is a summary of your income and expenses for a three-month period [VERIFY WITH HMRC / ADAM]. Your software builds it from the records you have already kept and sends it to HMRC.

It is not a tax return and no tax is paid with it. It gives HMRC, and you, an earlier view of how the year is going.

With more than one income source, such as a trade and a rental, each usually needs its own updates [VERIFY WITH HMRC / ADAM].

Because updates are built from your records, those records need to be reasonably current through the year. Leaving everything to the last week of a quarter tends to cause errors.

What is the final declaration?

After the tax year ends, you make any year-end adjustments and confirm your total figures. This replaces the familiar Self Assessment return for people in MTD.

The final declaration is where reliefs, other income and allowances come together. It is also where your tax bill for the year is worked out. The deadline for it is [VERIFY WITH HMRC / ADAM].

Figures sent in quarterly updates are not final. You can correct or adjust them at the year end, before you confirm the declaration.

What software will you need?

HMRC does not provide its own MTD software for most people. It publishes a guide to choosing compatible software and a finder tool listing products that have been through its recognition process.

There are two broad types. Some products keep your records and send updates in one place. Bridging software connects an existing spreadsheet to HMRC.

Check that the product covers every income source you have, such as both a trade and property. If you are also VAT registered, it is worth checking that the same product handles VAT.

How do you sign up?

HMRC explains how to sign up for MTD for Income Tax using your Self Assessment login. You may be asked to confirm your identity and give details of each business.

HMRC may write to people it expects to be in scope. You should still check your own position rather than wait for a letter. An accountant can also sign up on your behalf through a separate agent route.

How can you prepare now?

The general rules on business records if you are self-employed still apply. Good habits now make the move to quarterly reporting much easier.

• Work out your qualifying income from self-employment and property.
• Open a separate bank account for business income and costs if you do not have one.
• Choose software that suits how you already keep records.
• Start keeping digital records before you are required to.
• Agree with your accountant who sends the quarterly updates.

How does AFE help with MTD?

AFE Accountants is an ACCA member firm led by Adam Feyzi FCCA. It works with sole traders, landlords and small companies across the UK.

Its tax and VAT and accounts and bookkeeping services cover the records and returns behind MTD. Whether AFE files quarterly updates for clients is [CONFIRM: AFE’s MTD quarterly update service]. The software it supports is [CONFIRM: which bookkeeping software AFE supports].

Read more on the business owners page, or book a free consultation to check where you stand.