Stop Waiting for HMRC: Join Making Tax Digital Early

:: 00:00

Hello and welcome to another episode of I Hate Numbers. Today I'm going to be talking about something that's been on the horizon, kicks into the long grass, but now is getting closer and closer for many small businesses, sole traders and landlords. And that is Making Tax Digital - income tax, a bit of a mouthful or MTD for ITSA.

:: 00:20

Not sure which is better. Now I'm going to keep this practical, simple, and useful, and I'm going to throw in some examples and some illustrations to give it a bit more life. Now, at the end of this episode, you will know who must use MTD for income tax, who's exempt, what counts as income, when it starts for you, and how you should get ready now, not later on. Now, preparation will save you headaches down the track.

:: 00:46

Let's consider firstly, what is Making Tax Digital. Let's go to the beginning. Now, MTD is HMRC's plan to move tax reporting into the digital world. Instead of one big annual tax return, there'll be four quarterly updates sent via approved software. It's a bit like migrating from an old paper diary to an online calendar.

:: 01:06

There's going to be more regular updates for HMRC and yourself, greater visibility and fewer surprises at year end. Between me and you, there's also a compliance issue going on here, so each HMRC can monitor more closely what's going on and spotting any potential problems that might arise. But here's the important bit.

:: 01:25

MTD for income tax does not affect everybody straight away. It depends on who you are and how much you earn. So let's consider who must use MTD for income tax. Now if you are a sole trader or a landlord, or perhaps both, and your turnover is more than 50,000 pounds for 24/25, tick – you’re it. Now, turnover in this case by the way, means income before expenses are deducted.

:: 01:50

It's not your profits. HMRC will look at the full amount coming in, not what you have left over after paying costs. Let's throw in a couple of examples. Now we've got Deepak, the builder. Now Deepak is a self-employed builder. His turnover in 24/25 is 55,000 pounds. He exceeded the 50,000 pound mark, and he must now join MTD from the 6th of April 26.

:: 02:13

Imagine Sarah, a landlord. Now Sarah rents out three flats. Her gross rental income is 48,000 in 25/26. She's above 30,000, so she must join MTD from the 6th of April 27. Now, there is a pattern here. Let me reinforce what that pattern is. If you are earning over 50,000 pounds by way of turnover in 24/25, then you must register for MTD in April 26.

:: 02:39

As time goes on, those turnover limits will drop. So if it's 30,000 during the year 25/26, if you meet that criteria, then you register from April 27. And currently one year from that 26/27, if your turnover is 20,000 and above and that's remember from both self-employed and as a landlord, then you will register.

:: 03:02

Now what doesn't count? Now, not everybody will be in the net. Now, you do not need to be registered for MTD for income tax if your income is 20,000 pounds or less. Remember, income here is the same notion as turnover, fees or sales. You can qualify for exemption based on age, disability of where you live.

:: 03:21

Now you've got to apply for this and HMRC have got to approve that exemption application. Now exemption doesn't mean by the way that you waive having to do a tax return. You'll still have to do an annual self-assessment. You'll just be exempted from doing quarterly digital updates. So if you are a freelance designer, for example, and your turnover is 14,000 pounds per annum, you can be under the 20,000 pound mark.

:: 03:43

So there's no need to join MTD. So here's a bit of a checklist to see if you are affected. Well, for the tax years, 25 and 26, check the following. Do you follow a self-assessment return? Do you need to be registered for self-assessment? Do you have income from self-employment or property? What's your turnover before expenses?

:: 04:03

That's your key criteria. Registration for MTD will follow a year after the self-assessment limits have been breached. If you're over the threshold subject to the exemptions I've outlined earlier, you'll be entered into the MTD net. Now, let's imagine Pauline, our market trader. She runs a summer market stall

:: 04:21

and her 24/25 turnover is 52,000 pounds. Now it's a seasonal business, but actually relevant. The fact is she's exceeded the turnover threshold for 24/25, and therefore she must start MTD in April 26. Let's have a look at the idea of HMRC letters. Now, they are helpful, but I wouldn't suggest that you rely on them.

:: 04:44

Now, HMRC will check your self-assessment returns and in theory, send you a letter to see if you're over the limit. But don't rely on the postman. If you do your return late, you may be notified late. That letter may go adrift. HMRC may have a different address for you on file. So it's your responsibility to know when you must join.

:: 05:03

If you wait for HMRC and the letter goes missing, unfortunately your liability still stands. Now you submit your 24/25 tax return. For example, 51,000 pounds worth of turnover is disclosed. And remember, that's the aggregate of self-employed and property income. HRMC will send you a letter or should send you a letter, and it'll say from April 26th, you must use MTD.

:: 05:26

That's helpful, but don't sit back and wait for it. You need to get prepared. The next consideration is what do you do if you've got to be registered for MTD? Once that you’ve joined that exclusive club. Now, step one, choose the right software. You need to choose MTD compatible tools. For our clients, we're recommending Xero.

:: 05:45

We are Xero Platinum Partners, a little bit of a plug in there, and again, that would be the software we would recommend. There are other options out in the marketplace. QuickBooks, Free Agent. Step two, authorise it. You need to link the software with HMRC systems so those updates can be sent through. The next step,

:: 06:03

decide on the help. Are you going to be handling this yourself? Do you want to use an accountant? Talk to your current accountant. If you aren't currently supplied or you want some extra help, then by all means contact us and we're happy to help you out here. You need to agree between the parties who's going to be handing the submissions, and also you need to discuss the fees for doing that as well.

:: 06:23

There's going to be extra time involved in here so have that discussion and get that clarified up front. Step four, review your bookkeeping. You need to keep your records, your income records, updated regularly. You can't just wait until the end of the financial year to do that all. So again, that's going to be a good discipline for business owners here and for me,

:: 06:42

that's a great way to get closer to those numbers. Now let's throw an example. We have Sebastian who owns 53,000 pounds in 24/25. He signs up for MTD early in 25. By the time April 26 arrives, he's already confident and stress free. So you can join voluntarily. Test the system out. Get comfortable. Now a good question is why should you prepare now?

:: 07:05

Now, like most things in life, leaving it to the last minute does add an extra bit of pressure and stress. And if you delay, you risk missing those deadlines, paying penalties, wrestling with software at the 11th hour. Getting prepared early means a smooth transition. No last minute panic. And better control of your cash flow.

:: 07:22

Now, Leopold is in a situation where he’s set up his MTD software a week before the first headline. He struggled with the data import, missed the submission. The result… well, we know what the score is. If you are late with anything HMRC connected, then the fine book is in there in the background, ready to pounce.

:: 07:39

Don't be like Leopold. Be more sensible. Now, there are benefits, there are upsides of MTD for your business, so it's not just a stick. There is a bit of a carrot flavour here as well. Now, MTD will give you a real time view of how your business is doing. There are fewer nasty surprises at the end of the year.

:: 07:55

Better opportunities for tax planning. If you get closer to those numbers, you can see your quarterly profits building up, then you will see where you are moving into terms of tax band, opportunities, whether you should incorporate or not. Currently, there is no MTD regime for companies. So knowing where you are in terms of profitability, knowing how you're performing, even if you're making losses there, that gives you a warning signal to act before it's too late.

:: 08:21

Summarise where we are. If you are a sole trader or a landlord and you are registered for self-assessment in 24/25, and your turnover is over 50,000 pounds, then you start MTD in the year April 26. If you fast forward 12 months, if your turnover is 30,000 pounds plus, then you start MTD for income tax, April 27, and currently if it's 20,000 pounds in 27/28, then you start MTD in the following year.

:: 08:49

So over time, pretty much the majority of self-employed (landlords) will be registered for MTD for income tax purposes. Now, don't wait for HMRC to send out those letters. Take control, do it early. If you need help understanding the scheme, setting you up the right software, training you and your team keeping compliant, calm and confident,

:: 09:10

well, don't wait for HMRC, talk to your accountant or come and have a chat with us. Until next time, folks, plan it, do it and profit.