Making Tax Digital (MTD) for Income Tax
Basis periods will be abolished from 2022 under the draft Finance Bill 2022.
The purpose of this proposal is to remove the complexities from the taxation of trading profits for self-employed business owners, by integrating an upgraded, digital service via Making Tax Digital (MTD) for Income Tax. This would help reduce errors and ensure self-employed businesses get their tax right the first time.
The purpose of this proposal is to remove the complexities from the taxation of trading profits for self-employed business owners. The Making Tax Digital (MTD) service for Income Tax is an upgraded, digital, integrated tax aid that would help reduce errors; ensuring self-employed businesses get their tax right from the get-go.
Who will it affect?
Mainly affects unincorporated businesses with a trading income, whose year-end isn’t the 31st March. They will affect the following: –
- Self-employed traders;
- Individuals with a professional or vocation income;
- Landlords;
- Partners in partnerships;
- Trusts and estates;
- Non-resident companies.
What does it mean?
The Finance Bill 2022 will amend the Income Tax (Trading and Other Income) Act 2005. The changes will allow businesses to be taxed on profits arising in a tax year. (Tax year is 6th to 5th April)
The amendment will abolish the period rules and prevents overlap relief. This will result in all annual accounts being aligned with the tax year and in line with MTD for Income tax.
The transition will commence from 2022 to 2023, all businesses’ periods would be aligned to the tax year (6th to 5th April) and all outstanding overlap relief is given.
Effective from 6 April 2023 with MTD.
Why now?
Without this change to reporting periods taxpayers with several sources of income would need to file MTD reports for differing quarterly periods in the tax year. Leading to up to many MTD filings required per year, plus VAT returns.
HMRC confirmed that MTD would be extended as follows:
- MTD for VAT will apply to all VAT registered businesses, regardless of turnover, from April 2022 (currently it only applies to businesses with taxable turnover above the VAT threshold of £85,000).
- MTD for Income Tax Self-Assessment (ITSA) will be introduced from 6 April 2023 for unincorporated businesses and landlords with annual income over £10,000.
Your next steps
If you would like any help or advice please contact us.
You can use online software like Xero or Quickbooks.