MTD for landlords and sole traders still at trial stage

HMRC has re-issued brief guidance on Making Tax Digital for landlords and sole traders who will be required to report income tax quarterly at some stage in the future, although it is still only a pilot and will not be mandatory

Quarterly reporting plus a fifth yearly report is the long-term objective for the governmentt with the fifth report, the so-called final declaration, ultimately replacing self assessment tax returns.

An HMRC spokesperson told Accountancy Daily: ‘Businesses will not need to do four tax returns a year. Software will use the digital business records to automatically create a simple summary of business income and expenditure. Once a quarter, businesses must send this information to HMRC.

'For many, this will be a simple click of a button. At the end of the year, the business can adjust and finalise this information.’

This is still at the trial stage and only sole traders with one business or landlords with UK property will be able to use the system, and only if they do not have additional income of any kind, for example from a second business.

An HMRC spokesperson confirmed that 'the pilot has been open for two years - nothing has actually changed'.

As with the original guidance, once again there is no mandatory requirement for reporting. This would require legislation, although more detail could transpire in the Chancellor's first Budget on 11 March.

Although HMRC has stressed that this still only at the trial stage, the logical step would be for the government to press ahead with a wider rollout of Making Tax Digital in line with its wider tax digitisation strategy.

Making Tax Digital for income tax will only be available to a limited cohort of taxpayers during this continuting soft trial period, which is an opportunity to test out the systems among the smallest businesses with the most straightforward tax affairs.

Taxpayers are only able to sign up if one or both of the following apply:

  • they are a sole trader with income from one business only; and/or
  • a landlord renting out UK property only.

The scheme will still not be open to anyone who has income from any other sources, ie dividends, or other payments where tax relief is claimed.

Anyone using the MTD for income tax system will have to use accounting software to submit the returns, raising costs for individuals and business. The brief HMRC guidance states: ‘You must have software that’s compatible with Making Tax Digital for Income Tax before you sign up.’

Reporting is not mandatory as yet. Initially it will run as a soft pilot and will only be open to taxpayers registered for online self assessment. As with Making Tax Digital for VAT it may be better to wait until initial teething problems are ironed out as once you are signed up to the system it is not possible to then opt out.  

The new system appears to be going to mirror standard self assessment for the first year, as even after having signed up to MTD reporting online, taxpayers will need to ensure they have completed a self assessment return for the previous tax year.

In addition, no new businesses who are not registered will be able to sign up initially according to the guidance, which states: ‘You cannot sign up if you have never submitted a tax return before.’

Once signed up, the sole trader or landlord will have to keep digital records of all their business income and expenses. Every three months they will have to use compatible software to send a summary of business income and expenses to HMRC.

‘The software will tell you when to send the updates to HMRC, or you can choose to send them more often,’ HMRC said, but added that a special monthly payment plans would have to be set up ‘if you want to pay your tax bill more regularly’.

Once the update is sent in, the MTD for income tax system at HMRC will create a year to date calculation of how much tax is owed at any time based on the information provided in the summary.

There will also be a requirement for a fifth report, detailing the annual tax payable, which will have to be settled by 31 January of the proceeding tax year.

The HMRC guidance states: ‘At the end of your accounting period, you’ll need to finalise your business income and expenses. You’ll also be able to submit any personal income and reliefs you claim.’

In addition to the guidance for individuals, HMRC has also released separate guidance for agents and tax advisers signing up clients, which includes details about securing client approval to file under MTD for income tax and the requirement to have an agent services account.

HMRC guidance, Sign up your business for Making Tax Digital for Income Tax issued 10 Feb 2020

HMRC guidance, Sign up your client for Making Tax Digital for Income Tax issued 10 Feb 2020

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