HMRC recently updated their guidance for the next stage of Making Tax Digital for income tax.
Making tax digital for income tax is a new way of reporting property and self employment income to HMRC. You'll use software to keep digital records send frequent updates rather than filing a tax return at the end of the year.
How to meet the requirements of MTD
You need to use MTD compatible accounting software. The software you choose must allow you to:
create and store digital records of each of your business transactions
send updates of the totals of your business income and expenses every 3 months
confirm end of period statements
You will also need to make your final declaration. This will be possible either through your compatible software or your HMRC online services account.
You can find a list of compatible software here.
If you have more than one business
If you have more than one business, you must meet the requirements for each business. This means you must keep separate records and make separate submissions for each business.
If you receive property income from multiple properties, all properties that are:
in the UK are treated as one ‘UK property business’
outside of the UK are treated as one ‘overseas property business’
Authorise your agent to meet the requirements
Alternatively, you can authorise us to exchange data with your agent for any Making Tax Digital service. This will let your agent:
sign up your business
use software to create and store digital records on your behalf
use software to view, edit and send your data to us
If you’ve previously authorised an agent to act on your behalf, you will not need to re-authorise them for Making Tax Digital for Income Tax.
An agent may not have access to all your source data. If an agent cannot make corrections to your digital records, they will need to tell you about any corrections needed.
Keep digital records using software
You must use compatible software to keep digital records of all your business income and expenses.
Using the software, you should create records of your transactions:
as close to the date of the transaction as possible
before you send the quarterly update for that period
no later than the quarterly deadline
Authorise your software
You need to authorise your compatible software by entering your Government Gateway user ID and password into your software.
You must use the user ID you got when you signed up for either:
an agent services account
Send quarterly updates
Every 3 months, the software will create a quarterly updates using the digital records that you would have uploaded that quarter. Whilst you do not need to make any accounting or tax adjustments, doing so at this point will make your estimated tax bill more accurate
For example, if you use your business premises as your home, you may need to adjust the expenses that you claim in proportion to their non-business use. To do this, you would:
create a digital record for the expense
adjust the amount claimed in proportion to the percentage of non-business use
When you should send your updates
After your compatible software is authorised, you need to send updates for each income source to us every 3 months. Your software will tell you when and how to send the updates.
You can send updates more frequently, if you want to understand how a large receipt or expense will change you tax bill sooner.
You must send a quarterly update within one month of the end of the standard quarterly period. If you do not send it by this deadline, you may need to pay a penalty.
If you do not expect to have any additional transactions to record, you can send an update up to 10 days before the end of a quarterly period. For example, if you’re going on holiday and know that you will not be working for the remainder of the quarterly period.
Use standard quarterly period dates
6 April to 5 July
6 July to 5 October
6 October to 5 January
6 January to 5 April
Use calendar quarterly period dates
You will eventually be able to choose to use calendar quarters instead of quarters ending on the 5th day of the month.
If you notice an error in your digital records
You should update your records as soon as possible if you notice that you:
made a mistake when creating a previous digital record, such as accidentally duplicating a transaction
forgot to record an expense or a sales receipt
This will either be when you send your next quarterly update or when you confirm an end of period statement.
To update your records, you should change, delete or create a record, so the transaction is recorded correctly in the quarterly period in which it took place.
Your software will ask you to re-send the relevant quarterly update. When you have sent it, the new quarterly update will overwrite the previous one.
Finalise your business income
At the end of a tax year, the information you have sent in your quarterly updates will be combined together to show your income and expenses for the tax year.
You must have sent HMRC quarterly updates for each quarterly period before you can confirm an end of period statement.
If you have multiple businesses, you need to confirm an end of period statement for each business.
Before confirming the statement, you may need to:
make accounting adjustments
make tax adjustments
claim reliefs or allowances
These adjustments will amend the data that you have sent through your quarterly updates.
When you confirm an end of period statement, you will be declaring that:
the information you have provided for that business is correct and complete
you have finalised your tax position for that business, for the tax year
After submitting an end of period statement, you will be able to see an updated estimate of your tax bill.
When you should finalise your business income
The deadline for confirming an end of period statement is 31 January after the end of the tax year.
If you do not confirm by the deadline, you may have to pay a late submission penalty.
Finalise your Income Tax position
After finalising your business income, you may need to send HMRC information on personal income sources, such as savings or dividend income.
These income sources do not contribute to your qualifying income and do not fall under the Making Tax Digital for Income Tax requirements. This means you do not need to report them quarterly, but you can choose to do so.
You can make your final declaration through your Making Tax Digital for Income Tax compatible software if either:
you’re able to submit data on all of your personal income sources through your software
you do not have any personal income sources to declare
If your software does not support the submission of your personal income sources, it will be possible to use your HMRC online services account to submit this data instead.
Once you have told HMRC about all of your taxable income for the year, you can make your final declaration.
When you make your final declaration, you will be declaring that:
the information you have provided is correct and complete
you have finalised your Income Tax position for the tax year
This is the last step of reporting your income to HMRC and replaces the need to send a Self Assessment tax return.
When to finalise your Income Tax position
You must make your final declaration by 31 January following the end of the relevant tax year.
If you miss the deadline for your final declaration, you may need to pay a penalty.
The information provided will then be used to generate your final Self Assessment tax bill for that tax year.
If you do not pay your Self Assessment tax bill by the relevant deadlines, you may need to pay a late payment penalty.