Making Tax Digital (MTD) is a key part of the Government’s tax administration strategy and aims to reduce the tax gap by requiring businesses and individuals to keep digital records, use software that works with MTD and to submit updates every quarter, bringing the tax system closer to real time.
Whilst MTD for VAT has been live since April 2022, the commencement date for MTD for income tax (IT) has already been pushed back several times since it was first announced in 2015. As it stands, MTD for IT will be phased in from April 2026.
If you farm as a sole trader and/or have rental property income, then you might be amongst the first to comply:
Initially, from April 2026, MTD for IT is mandatory for self-employed individuals and landlords with gross trading and/or property income totalling more than £50,000.
From April 2027, this threshold drops to £30,000.
If you farm or trade in a partnership, or are an individual with income of below £30,000, no date has yet been given as to when you may need to comply with MTD, but a review later in the year should shed further light on this.
You might ask how any of this affects you right now as there are years before MTD for income tax gets introduced? Well, whilst MTD has been pushed back to April 2026, new rules that were originally due to tie in with the timing have not:
The basis period reform is still set to go ahead from April 2024 with a transitional period in the 2023/24 tax year.
Under new rules, individuals and partners will be taxed based on profits arising during the tax year rather than the profits for the accounting period ending in the tax year.
If you do not currently prepare your accounts to 31 March or 5 April, then the misalignment of accounting year and tax year could result in an accelerated tax liability in the transitional year as overlap profits arise. Whilst this could tip you into a higher marginal rate of tax, there are also planning opportunities available as the accelerated period profits can be spread over five tax years.
One should also consider the additional admin burden that arises with a misaligned year end as accounts for the tax year would need producing, as well as the standard accounts for the accounting year.
Similarly, one should consider timing issues. Should your year end be December, this leaves you with only one month to finalise your accounts to determine figures for the prior 1 January to 5 April period, as these need including on your tax return.
What can you do to prepare for the upcoming changes?
Now: Start thinking about changes needed to your record keeping systems so you can comply with MTD when the time comes. For example, consider moving to cloud accounting or using bridging software etc.
When preparing your next accounts: Consider changing your accounting year end to align with the tax year. This is likely the most straightforward option, although not always optimal commercially.
If you are looking to sell assets: If you anticipate a large balancing charge to arise, planning the timing of the sale could prove advantageous, as it could result in the arising profits being spread over five years.