Making Tax Digital for sole traders

In this post we discuss Making Tax Digital for sole traders. Essentially Making Tax Digital (MTD) will require sole traders to complete digital tax records, with the ultimate aim of going completely paperless

Making Tax Digital for sole traders

What is Making Tax Digital?

Making Tax Digital is a UK government initiative that sets out a vision for the 'end of the tax return' and a 'transformed tax system'.

Making Tax Digital has been a fact of life for VAT-registered businesses since 2017. From then onwards HMRC’s requirement has been for VAT returns to be submitted digitally, using accounting software. A phased implementation is designed to ensure that all taxpayers will be required to file tax returns. This includes sole traders with annual sales over £10,000 who will be required to file quarterly digital returns from April 2023.

How will Making Tax Digital work?

We summarise below some of the main points for consideration:

  • MTD imposes new quarterly filing (and potentially payment) obligations for businesses .Additionally an annual declaration confirming quarterly submissions will be necessary
  • A new late filing and penalty system will eventually apply to quarterly returns and annual declarations.
  • The annual tax return will become obsolete. However, businesses will still be required to prepare annual accounts so that quarterly returns and payments may be reconciled. Plus, it will ensure that appropriate reliefs are claimed, and accounting adjustments made.
  • HMRC will pre-populate the annual declaration with some return figures, for example interest received, employment income, and these figures will need to be checked.

Practicalities for Making Tax Digital for sole traders

Under the new regime, sole traders will now have the following considerations to take into account:

  • Sole traders not already using software to record their income and expenditure will need to use a spreadsheet or accounting software or app to fulfil their obligations. Plus they will need a good internet connection and data storage facility.
  • Record-keeping and submission of data can be delegated to an accountant or bookkeeper.

Additional reporting requirements

Unfortunately, as part of Making Tax Digital for sole traders, HMRC will now require five tax returns per year!

Assuming an accounting year corresponds with the tax year, the first report will be due for the quarter ended 5 July 2023. Subsequent reports will be due for the quarters ending in October 2023, January and April 2024. The fifth report (the annual declaration) will follow later.

Making Tax Digital for sole traders – in summary

Making Tax Digital is a revolutionary change to the tax system. It’s a key part of the government’s plans to make it easier for taxpayers and businesses to get their tax right. Plus keep on top of their affairs at the same time. It also imposes increased record-keeping and reporting tasks. It’s less than two years away. Not getting it right may prove costly in terms of tax payable. Although penalties for non-compliance won't be imposed immediately, eventually these will be levied and represent an avoidable burden.

 For more useful information, check out our Ebooks here.

And if you'd like to know how we can help you with all of this, or with anything else, feel free to give us a call on 01202 048696 or email us at [email protected].

Alternatively, please feel free to complete our Business Questionnaire here.

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Why Friendly

The Friendly Accountants are Alternative Accountants. Unlike traditional accountants, we look forward - not back.

We work with small businesses and contractors/freelancers who want to embrace the world of online software and the benefits this brings.

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