Making Tax Digital for Sole Traders: What does it mean?

The way in which self-employed taxpayers will report their income and expenses is set to change with HMRC from April 2023 for Income Tax. This is under the Making Tax Digital (MTD) initiative from HMRC.

What is MTD?

Making Tax Digital is a key part of the government’s plans to make it easier for individuals and businesses to get their taxes right, with the goals of making tax;

• more effective

• more efficient

• easier for taxpayers to get their taxes right

What does this mean for Income tax?

So currently as a sole trader or partnership, you will complete a Self Assessment tax return once a year and pay your balance of the tax owed and possibly payments on account (payments in advance).

Under MTD, it is likely that the Self Assessment tax return will be replaced by five new reporting obligations. There will be quarterly updates required and a year-end final declaration.

This change is due to start on or after 6 April 2023 for self-employed businesses and landlords with business turnover above £10,000.

What rules do I need to follow?

To follow the rules for Making Tax Digital for Income Tax, you’ll need to:

• keep digital business records

• get compatible software

• sign up

• send business income and expenses updates

• finalise your business income

• submit a final declaration instead of a Self Assessment tax return

Is there more work involved?

Technically there shouldn’t be more work involved but there may be additional admin, deadlines and reporting to keep on top of. Instead of looking at a tax return once a year, it’s going to be 4 quarterly returns and an end of year submission. So you may have previously handled this yourself but it may be worth looking at hiring an accountant if you do not want to incur the additional time required on submissions.

What Software is available?

Here at Tax Ninja, we are recommending Coconut as they are the leading smart bookkeeping and tax app dedicated to Sole Traders. Also, this app ticks lots of the boxes when it comes to MTD and compliance. Their app includes invoicing, bookkeeping, receipt capture and tax overview to give Sole Traders a fantastic platform. If you signup for one of our monthly plans, we’ll include this as a part of your package.

If you’re unsure if these MTD changes affect you give us a call today on 01869 323887 and we can discuss further.