Self Employed- The end of the traditional Self Assessment return is nigh

*Please note the information in this article may be out of date

HMRC extend Making Tax Digital rules to all VAT registered and Self Assessment returns starting 2023.

On the 21st of July 2020, HMRC released updated guidance on their 'Making Tax Digital (MTD)' programme. This initiative is the key part of HMRC's desire to : 'to become one of the most digitally advanced tax administrations in the world'. The plan is to gradually extend the MTD initiative to cover all VAT returns by 2022 and Income Tax / Self Assessment returns for most unincorporated self employed tax payers, by 2023.

VAT

Currently, businesses with a taxable turnover above the VAT threshold of £85,000 are required to keep digital records and use 'functional compatible software' to submit their VAT returns. For returns made on or after April 2022, all those registered for VAT, regardless of whether they are above the £85,000 threshold or not, will have to keep digital records and complete online VAT returns. VAT return and payment dates will not be affected. For more details on  MTD VAT set-up, see HMRC here.

Self Assessment

Income Tax returns by the self-employed are the next area where the MTD initiative will be rolled out.  In the case of unincorporated self-employed businesses and landlords with annual business or property income above £10,000, the rules of the MTD programme will apply for accounting periods starting on or after the 6th April 2023. Digital records will need to be kept and online real time returns made throughout the tax year.

The annual Self Assessment tax return will be replaced by five new, real time returns, made during and after the tax year. These will include 4 quarterly, real time returns of a businesses income and expenses, and a final end of tax year return, using HMRC and MTD compatible software. It is expected that tax will be collected 4 times a year, but details on that have yet to be made clear by HMRC.  It is unlikely that penalties will apply in the first year or so while the roll out begins.

According to HMRC: 'Some businesses and agents are already keeping digital records and providing updates to HMRC as part of a live pilot to test and develop the Making Tax Digital service for Income Tax. If you are a self-employed business or landlord you can voluntarily use software to keep business records digitally and send Income Tax updates to HMRC instead of filing a Self Assessment tax return.' More about voluntarily following MTD reporting rules now.

The Software

MTD -compatible software means software that can integrate with HMRC systems to send updates to HMRC. This software is not being made available by HMRC directly, rather, they are working with existing software developers to help them develop a range of applications that enable businesses to keep their records digitally and integrate with the HMRC systems. Self-employed and landlords should be checking now to see that the software they are using is MTD compatible. More information on HMRC guidance on software.

Digital Exclusion Opt-out

You can be excluded from the electronic book keeping and filing online return elements of MTD if you are unable to comply, for example due to age, disability or religion. Be aware that you will need to satisfy HMRC that you cannot partake in MTD before they will agree to this exemption, more here.