HMRC has confirmed that Making Tax Digital (MTD) will apply from April 2023. Unincorporated businesses with trading and/or rental income exceeding £10,000 per year will be required to keep their accounting records electronically and file quarterly updates with HMRC. In addition, a final end of period submission will be required, after the end of the tax year. It is estimated that four million businesses will be affected.

Individuals and partnerships with individual partners will be included in MTD. Partnerships with corporate members, Limited Liability Partners (LLPs), Limited Partnerships, Trusts, Estates and pension schemes will be excluded.

The tax year basis

In anticipation of the MTD implementation, HMRC is proposing a change to the current rules as to how profits are allocated to a tax year. The proposal is to replace the existing current year basis for trading income with a new tax year basis.

The current year basis means taxable profits for a tax year are normally based on the accounting period ending in a tax year; for example, accounting profits to 30 September 2020 are taxed in the tax year 6 April 2020 to 5 April 2021. With the proposed changes, tax would instead be payable based on the profits of the tax year: with a 30 September 2023 year end, for the tax year 6 April 2023 to 5 April 2024, the apportionment would allocate 6/12 of the year to 30 September 2023 and 6/12 of the year to 30 September 2024. Unless the accounting period end is 31 March/5 April, this will mean that two years’ accounting profits will need to be apportioned for tax purposes. This may mean that estimates are required for the tax return, as figures for the later of the two years may not be available when the tax return is submitted. HMRC has proposed that such businesses would revise their tax return once figures for the second year become available.

Transition

The 2022/23 tax year will be a transition year and for unincorporated businesses which do not have a 31 March/5 April accounting date, more months of taxable profit will be taxed in this year.

Following the same example, a 30 September 2023 accounting date will lead to 18 months’ profits being taxable in 2022/23: the 12 months to 30 September 2022 and the period from 1 October 2022 to 31 March/5 April 2023.

Overlap relief may apply, but in many cases, there will be increased tax liabilities for 2022/23. HMRC proposes that the additional profit may be spread over up to five future years.

Submissions to HMRC

If the tax year basis proposal is implemented, all businesses chargeable to Income Tax on trading income will commence MTD from 6 April 2023.

The quarterly submissions to HMRC will be required to include total income and total expenses, by defined categories.

Assuming that all businesses will be assessed on the tax year basis, the quarterly submissions will be due as follows:

In addition, an End of Period Statement (EOPS) must be submitted to HMRC by 31 January following the end of the tax year, eg by 31 January 2025 for the 2023-24 tax year. The EOPS will include any accounting adjustments such as Capital Allowances and the offset of losses, and any other sources of taxable income or gains not included in the quarterly submissions.

The tax payment dates will remain unchanged. Quarterly tax payments will not be due.

The end of Self-Assessment?

Taxpayers who do not have rental income or self-employed income and who are therefore not in MTD, will continue to file Self Assessment returns, for the time being.

Next steps

The introduction of MTD for income tax will mark a fundamental change to the UK tax system. We expect the MTD regulations to be published this autumn, and we will update you then.

In the meantime, please consider the following as early preparation:

• Set up a separate bank account for your trading or rental income and expenses, if you do not already have one
• Talk to your haysmacintyre contact about digital bookkeeping and record keeping
• Consider changing your accounting year end to 31 March or 5 April, if required
• Submit your views on the proposed move to the Tax Year Basis to HMRC, by 31 August
• Start collating your income, expenditure and other tax information on a real time basis now, rather than waiting until April 2023