QUESTION: I run a farming business and I keep financial books and records on spreadsheets. I provided these spreadsheets to my accountant every quarter for him to submit my VAT returns. I am reading that I will have to keep digital records for my business and submit them quarterly to HMRC. Is this correct?
ANSWER: Making Tax Digital (MTD) for VAT was first introduced back in April 2019 and resulted in many businesses having to keep digital records and using accounting software to complete their VAT returns.
Currently most VAT registered businesses with turnover exceeding £85,000 are complying with the MTD legislation and from April 2022 this was extended to all other VAT registered businesses.
While it is good that you have been keeping records on spreadsheets for your accountant, this alone will not be sufficient to comply with MTD, as VAT returns must be submitted to HMRC through MTD compatible software. Your accountant will have had to use MTD compliant bridging software to submit the figures from your VAT returns each quarter.
With all VAT registered business under MTD, it is expected to be introduced for Income Tax from April 2024 for self-employed businesses and landlords, with a further 12-month delay for partnerships from April 2025. MTD for Income Tax will apply to businesses with annual income above £10,000.
MTD for Income Tax is similar to MTD for VAT in that businesses will need to keep digital records and use accounting software to send information to HMRC on a quarterly basis, the main difference being that MTD for Income Tax will be sending details of income and expenditure each quarter, not just submitting VAT return figures which is the case in MTD for VAT.
As the turnover threshold must consider a taxpayer’s income from all of their sole-trader businesses, plus their rental income, HMRC needs to pull together several figures from the taxpayer’s self-assessment tax returns. Only when the tax return totals reach the £10,000 threshold will HMRC issue a notice to file under the MTD regulations.
Unlike MTD for VAT, HMRC will determine who is caught by MTD ITSA and will apply the turnover test to the figures reported in your 2022/23 tax return.
If you are caught by the new requirements, you’ll need to maintain digital records and file digital quarterly summaries starting in the quarter ending July 5 2024. Importantly, this filing should follow the tax year, rather than your accounting year end dates (unless they happen to be the same). There’s only a one-month window for filing, by the 5th of the following month, so the first filing deadline will be August 5 2024.
At the end of each tax year, and after filing quarterly summaries, an End of Period Statement (EOPS) will be required for each business you own and for any income from property. You may want to involve your accountant with this statement to ensure that this includes any necessary adjustments to take advantage of allowances and tax reliefs.
By January 31 following the tax year end, you will also need to legally declare, via the submission of a Final Declaration, that you’ve provided HMRC with all the information they require and that you agree with their income tax calculation. This final declaration brings together all your tax information from quarterly updates and EOPSs, together with any income that falls outside of MTD, such as dividends and interest, very much like your self-assessment return that you would be currently used to.
Although the introduction of MTD for income tax is a while off yet, you should start to have conversations with your accountant to see what can be done to ease the filing burden, in particular whether worth aligning your accounting period with the tax year and how best to collate your records.
KellyAnne Murtagh (k.murtagh@fpmaab.com) is senior manager at FPM Accountants Ltd (www.fpmaab.com). The advice in this column is specific to the facts surrounding the question posed. Neither the Irish News nor the contributors accept any liability for any direct or indirect loss arising from any reliance placed on replies.
