Making Tax Digital – Sole Traders and Landlords: Part One

I was interested to read recently that the cost of implementing Making Tax Digital (MTD) will be around £1bn more than previously estimated. The MTD initiative has been beset by delays much to the frustration of professional advisers and software providers, so I guess it is not surprising to hear that these delays have resulted in additional costs.

HMRC have stated that the aim of the MTD initiative is to help individuals and businesses pay the correct amount of tax. It is an ambitious project and represents the biggest change to the management of taxes in the UK since the introduction of self-assessment. Currently MTD only relates to VAT submissions, but the plan is to include income tax and eventually corporation tax. 

MTD is all about maintaining digital records and making submissions to HMRC electronically on a quarterly rather than an annual basis. You may have seen advertisements from the main bookkeeping software providers (Xero, Sage, Quickbooks etc). The days of keeping records on an Excel spreadsheet will soon be over. There will be a requirement under law to keep digital records of all income and expenditure using MTD compatible software.

The next stage in the implementation of MTD will involve income tax – so this will impact upon sole traders and landlords. MTD for income tax will apply to all sole trader and landlord businesses with annual income of more than £50,000 from April 2026. From April 2027 it will be extended to all businesses with income of more than £30,000. Businesses that do not meet the requirements for MTD will have the option of continuing to submit tax returns under the current self-assessment system.

It's important to note that MTD applies to gross income (or turnover) rather than profit for all businesses, but that there is a separate reporting requirement for each business. For example, an individual with separate sole trader and letting businesses each with turnover of £16,000 in 2027/28 will need to make separate submissions for each of their businesses from April 2027.

MTD will not impact partnerships for the time being but at some point in the future MTD for partnerships will be introduced. MTD for corporation tax will not be introduced before April 2026.

Although April 2026 seems a long way off, businesses may want to think about making their systems MTD compatible well before then. It may also be sensible to think about adjusting accounting periods for businesses which do not have a 31 March/5 April year end and aligning them with reporting date to ease administration.

‘Basis period’ reform is also being introduced from April 2024 and will impact existing sole trader and partnership businesses. 

In Part Two I will consider the changes to tax reporting requirements under MTD.

Photo by Kaitlyn Baker on Unsplash.

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Making Tax Digital – Sole Traders and Landlords: Part Two

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