Changes on the horizon for self-assessment as HMRC expands Making Tax Digital

From April 2024, the government’s flagship system which aims to make accounting easier and reduce tax losses, will become obligatory for all those who complete a self-assessment (SA) tax return and have personal income above £10,000.

The new regulations apply to all individuals who are subject to income tax on the profits of their trade, profession, vocation, or property business. MTD for SA was due to be implemented in April 2023, but the government has recently pushed this back due to the challenges of the pandemic. General partnerships are brought in from April 2025.

The main changes include the directive to keep all records in a digital format, keep records on a transactional basis (or daily basis for retail businesses) and submit quarterly returns to HMRC via compatible software, instead of annual self-assessment returns. At the end of the tax year, a final return will be submitted, and balancing payments by 31 January after the tax period (and payments on account during the year) are expected to remain.

Whilst 2024 may seem a way off, taxpayers may need to make a number of significant changes in order to fulfil the HMRC requirements on time. In order to make the transition easier, HMRC has set up a digital tax returns pilot scheme. The voluntary scheme guides users to sign up and understand MTD for Income Tax and advises on compatible software for tax update submissions. The scheme is intended to encourage business owners to move to more regular digital recording, and it will help HMRC test its systems and processes. It is estimated that a third of eligible businesses have signed up so far.

Furthermore, HMRC has suggested that a change in the basis period (the period on which you are charged tax in a particular tax year, or the accounting year end of businesses run by the self-employed) may be introduced to make record keeping easier. Currently, many businesses run their accounting year from January to December, although HMRC self-assessments cover the year from 6th April to 5th April. Small business owners are concerned that this could lead to larger tax bills in the year they transition to MTD, if tax is assessed on a period of greater than twelve months. Where the basis period is not changed, the taxpayer will need to estimate results for the months between their accounting year end and the tax year end of 5th April or 31st March.

Michael Fotheringham, partner at James Milne Chartered Accountants commented:

“Making Tax Digital, which began with MTD for VAT, has been rolled out fairly slowly, allowing businesses time to gather the correct information and transition to digital record keeping.

Across our offices in Aberdeen, Inverurie and Banchory, most clients have made the changes fairly smoothly and the longer-term benefit of digital, real-time accounts is useful, especially when it comes to accessing timely accounting information.

“Changing an individual or business’s year end may have long term benefits, especially as the collection of taxes becomes more automated. Making the adjustment to the taxation basis period could be challenging during the changeover period, but digital record keeping, and tax advice will smooth the transition period.

“The important message is to speak with your accountant for advice and be ready for the change when it comes by commencing digital record-keeping as soon as possible.”