MAKING TAX DIGITAL: FOUR STEPS TO PREPARE FOR NEW APPROACH TO INCOME TAXES

November 2023 - The UK Government is rolling out its new system for self-assessment tax returns called Making Tax Digital (MTD), a key part of the their Tax Administration Strategy. MTD is aimed at making it easier for businesses and individuals such as sole traders to get their tax right. The new legislation will come into full effect in April 2026 for businesses, self-employed individuals, and landlords with income over £50,000, and in April 2027 for those earning over £30,000.

While the programme is still two years away, it will be worth the wait as MTD will completely end the need to submit annual tax returns. In addition to simplifying self-assessments, MTD will also provide taxpayers:

• The ability to keep digital records and submit tax returns digitally, removing the risk of human error
• Utilising technologies like artificial intelligence (AI) for task automation which allows for reduced time spent on administrative work
• Insight into a persons’ financial status and performance at any moment, which empowers them to make quicker, more informed decisions

MTD will also provide greater awareness of how much tax a person owes, so they can avoid setting aside more money than they need, or importantly, not allocating enough.

Best-practice

MTD for Income Tax will first be introduced in April 2026 and will continue to rollout through April 2027. However, this will only apply to individuals with earnings surpassing £50,000 (later revised to £30,000) from their businesses or properties. If income from these channels falls below these thresholds, a person can opt to persist with the current Self-Assessment system.

Transitioning to a new tax system can be daunting, but there are four simple steps you can take to prepare for the new programme:

1. Work out if MTD for Income Tax will apply to you
   It’s relatively simple to work this out, as the guidelines are quite straightforward: Take your income from any sole trader business(es), plus any rental income from property you own. If this is above £50,000, you’ll need to register for and comply with MTD for Income Tax from April 2026. If it’s below £50,000 but above £30,000, you’ll need to comply from April 2027.
2. If you operate multiple businesses, ensure that the accounting periods for each are synchronised with standardised reporting dates
   Aligning your accounting periods in this manner will streamline the process of submitting quarterly updates, allowing you to address them all simultaneously and in compliance with HMRC regulations. If you require assistance with this adjustment, consult with your accountant.
3. Look at your business administration and discern how much of it’s compatible with MTD for Income Tax requirements
   You need to ask yourself: How much paperwork do I continue to rely on? Even spreadsheets might present issues when it comes to MTD for Income Tax – think deleting entries accidentally, mistyping, overwriting the contents of a cell, plus the need to make those quarterly updates, EOPS and final declarations.
4. Start your digitalisation process as soon as possible
   Give yourself ample time to learn and familiarise yourself with MTD. It’s best to get a headstart now, but, if you have questions or are uncertain about any part of the programme, it’s best to reach out to an accountant to make sure everything is filed correctly.

We understand that self-assessments can be complicated, and the financial implications of any subsequent investigation can be massive. Arc Legal offers Tax Protection insurance under our Assistance product and services offering and is available as part of our Legal Expenses Insurance solution, or as a stand-alone product.

Tax Protection insurance cover includes a dedicated Tax Helpline manned by a team of accountants who can help policyholders with their tax queries. The policy also covers both the accountants and the customer’s legal fees if they are subject to investigative action by Inland Revenue & HM Customs and Excise.

Rumel Ahmed, Partnerships Development Manager, Arc Legal Group

Find out more about Arc Legal’s Tax Protection cover here, contact Rumel Ahmed on 07725 758377 or email rumel.ahmed@arclegal.co.uk.