Making Tax Digital for Income Tax on hold, again!

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If you were due to submit a self-assessment tax return and pay your dues by yesterday’s deadline and you missed it you should do so now without delay, otherwise you will face a penalty. Anyone with rental income must submit a self-assessment income tax return, completing the property income section.

Making Tax Digital Delay

HMRC says that after discussions with the various professional bodies involved, software providers and tax accountants it has now confirmed that MTD for Income Tax will be delayed by a further two years, until April 2026.

However, there are still some important changes for all business and landlords, read on…

Making tax digital (MTD) for income tax self-assessment was originally planned to commence in 2018 but Covid and other delays put this deadline back to 2023, and then it became 2024. However, it was announced just before Christmas that the new system of submitting digital information quarterly to HMRC has been delayed yet again!

The start date will now be dependent on the gross business receipts of individuals. The new target is for self-employed business people and landlords, those with gross annual receipts above £50,000 will need to enter the MTD for income tax from 6 April 2026. Those with gross annual receipts between £30,000 and £50,000 will be included from 6 April 2027.

So good news for those small-scale landlords with rental incomes at the lower end of the scale: it looks like the original £10,000 threshold has now been scrapped and raised to those with annual gross receipts above £30,000, it’s under review but it would appear that the government may have finally bowed to pressure and increased the starting threshold from the £10,000 figure, which would have brought into the MTD regime a lot of private landlords.

The changes in brief:

The two-year delay is also accompanied by other changes. The new implementation plan for MTD for income tax after April 2026 is as follows:

– Minimum income reporting threshold increased to £50,000, from the initial threshold of £10,000

– Those with business income above £30,000 will join MTD in April 2027

– Those with income below £30,000 may not be required to enter MTD, though this is to be reviewed.

MTD, the plan

Originally intended to increase efficiency for businesses and HMRC, going digital would mean eventually cutting down on administrative time and cutting out fraud, the scheme was first floated as an idea in 2015.

It requires completing a quarterly return to HMRC rather than the present system of annual reporting for self-assessment tax returns. MTD would represent a major change in the way income tax self reporting is handled in the UK, necessitating the development and use of compatible commercially available software.

The system would provide an estimated tax calculation based on the information provided to HMRC, to help taxpayers budget for tax. At the end of the year, any additional or non-business information can be added and a finalised tax calculation made. MTD therefore replaces the annual Self-Assessment tax return as we know it.

Benefits of digital

Business and landlord taxpayers are therefore being advised that switching to a digital system using appropriate and compatible software, regardless of your level of gross income, is still a good idea.

The new business Tax Year Basis to go ahead

Change is still coming for all businesses and landlords because although the start of MTD for income tax has been delayed until 2026 at the earliest, the start date of the new regime for taxing the profits of unincorporated businesses on a Tax Year Basis is not being delayed. This transition is to take with effect from the tax year to 5 April 2024.

This will be a major change for those smaller unincorporated businesses that prepare their accounts to any date other than the normal tax year, 5 April or 31 March. From 6 April 2024 all such businesses will have to calculate their taxable profits from 6 April to 5 April each year, regardless of their normal accounting year end date.

For example, for a sole trader or partnership making up its accounts to 31 December each year, their 2024/25 profits would have to be calculated as 9/12ths of their profits for the year ended 31 December 2024 plus 3/12ths of their profits for the year ended 31 December 2025.

This will mean doing an estimate of profits for the later period (3/12ths) with a subsequent amendment once the actual final figures are available. It is for this reason many businesses would benefit from changing their accounting date and also going digital.

There’s a change in the way that profits are to be taxed for the 2023/24 tax year. The upcoming tax year will be a “transitional year” with some complicated HMRC rules for calculating business profits. For many businesses the change could result in a higher tax bill initially, affecting short term cash flow.

So, although MTD for income tax will apply only to the self-employed and landlords initially, the tax year basis changes will soon apply to all unincorporated businesses, including partnerships and LLPs, and those with profits of less than £50,000.

Speak to your accountant in good time.

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