The government’s Making Tax Digital (MTD) initiative is set to modernise the income tax and self-assessment system in the UK. It claims that the new process will be “more effective” and “more efficient” while making it easier for taxpayers to submit the right information and reduce mistakes, which have contributed to an annual “tax gap” of around £34bn.
The new system is set to apply to all income tax returns from April 2024, but the government is already running an ITSA pilot programme to help millions get on board early. HMRC recently announced that six new income types will be eligible to join MTD from July this year. These include those who are self-employed and have UK property and Pay As You Earn income.
Making Tax Digital for business is a notable departure for HMRC as the annual tax return system has been in place for a long time. The new, faster system will see taxpayers submitting digital records every three months instead, which will reduce the burden on HMRC and help everyone keep on top of their financial obligations. Launched in 2019, more than a million people have already signed up and 69% say that they have benefited in some way.
“By signing up for Making Tax Digital, we expect most businesses to experience long-term benefits, including reduced errors and time saved in managing their tax affairs,” HMRC Director General Joanna Rowland says.
The extended pilot programme will include those eligible with an accounting period through to 5th April 2022. However, perhaps most importantly, clients need to have MTD-compatible software, such as that offered by Sage. This software is central to MTD as it keeps records in a digital format and underpins the entire system. HMRC lists full eligibility criteria on its website if you want to find out more.
After signing up, taxpayers can start submitting records, with HMRC noting that it will test the first quarterly submission from 6th July for those who are already part of the scheme, though it may take the government department a bit longer to get round to the newer income types.
HMRC has encouraged those eligible to join the MTD ITSA as they will “have the benefit” of getting to grips with the system and testing it out before it is fully launched in 2024. Signing up now will improve taxpayers’ “own processing for managing MTD”, according to HMRC.
HMRC urges those interested to contact the software developer that runs its MTD software or to email it directly to find out how to sign up and use the new system. For anyone who meets the criteria but doesn’t want to take in the pilot just yet, HMRC recommends planning for the April 2024 deadline, which will help with managing your money.
This means that taking the steps to digitise your records with an accountant and understanding what you will need to do to keep them up to date and file them. Quarterly returns will need to be submitted a month after each quarter ends. Anyone who is not ready for the switch could face penalties, so it is a good idea to start preparing now.