VAT registered business making taxable supplies above the £85,000 registration threshold have been grappling with Making Tax Digital (MTD) since April 2019. The next roll-out will be the introduction of MTD for income tax which is scheduled to start in April 2023.
The obligation to keep records in a digital format and report information quarterly will apply to unincorporated businesses and property landlords with gross income in excess of £10,000 a year. Businesses operating MTD for VAT will already have MTD compliant accounting software but the extension of MTD to income tax will mean a major change for property rental businesses who are outside of the current rules.
There are a number of MTD compliant accounting software packages that you might wish to consider and we can of course advise you on the one that is most appropriate for your business. There are even relatively cheap software packages specifically designed for property rental businesses.
INFORMATION IN QUARTERLY MTD FOR INCOME TAX REPORTS
The precise details of what needs to be reported each quarter have yet to be finalised, but the categories of income and expenditure are likely to be the same as currently reported for self-assessment.
The accounting software will need to record income and expenditure into the following main categories:
• Turnover/gross rents
• Costs of goods sold
• Materials
• Wages and salaries of employees
• Sub-contractor costs
• Rent, rates, power, insurance
• Repairs and renewals
• Professional fees
• Telephone and other office costs
• Interest on bank and other loans
• Motor and travel expenses
It is unclear at this stage how loans to finance residential lettings will be reported as those costs are no longer deducted in arriving at rental profits as relief is now given by way of a basic rate tax deduction.
TIMING OF MTD FOR INCOME TAX REPORTS
It is currently proposed that there will be 4 quarterly reports to HMRC followed by a finalisation return when end of year adjustments will be made. For a buy to let business that would mean quarterly returns made up to 5 July, 5 October, 5 January and 5 April. There would then be a MTD finalisation submission the following 31 January.
BIG TAX BILLS FOR THE SELF-EMPLOYED IN 2022/23
Draft legislation has been published to change the basis periods for the assessment of self-employed profits to coincide with the tax year. The proposed new rules provide that from 2023/24 onwards profits or losses will be apportioned to tax years where the period of account does not coincide with the tax year. This is intended to coincide with the start of Making Tax Digital for income tax.
The transitional rules proposed for the previous 2022/23 tax year could result in large tax bills for some sole traders and partners, particularly those with an existing 30 April year end. The profits of year ended 30 April 2021 would be taxed in 2021/22 under the current rules with 2023/24 taxing profits arising between 6 April 2023 and 5 April 2024 under the new rules. But what about 2022/23?
The profits taxed in 2022/23 would be those for year ended 30 April 2022 plus the period 1 May 2022 to 5 April 2023 - in total 23 months profits!
The good news is that there would be a deduction for 11 months “overlap relief” which typically arose when profits were taxed twice at the start of the business - but those will often be much lower than the extra 11 months being taxed in 2022/23!
The transitional provisions allow the taxpayer to elect to spread the excess profits over the next 5 tax years to smooth out the excessive tax bill.
The Treasury are also consulting on changing the tax year itself from the archaic 5 April year end to 31 March or even 31 December. A calendar tax year would bring the UK into line with most other countries at last!
We will keep you updated when more information comes available and we can work with you to advise you on how much to set aside to cover these additional tax liabilities.
Please contact a member of our team if you would like to discuss any of the issues raised.
Dawn, James, Mark, Deb, Penn, Lucy and Becky
Telephone: 01969 624999
Email: info@clarksonsaccountants.co.uk