Making Tax Digital Update

Helen Knight and Norman Allison discuss some of the key points to consider around Making Tax Digital for Income Tax Self Assessment. Following a recent lecture we take the opportunity to unpack some of the most frequently asked questions, clarify common misconceptions, and explore what these changes mean for taxpayers and particularly their advisors.

For a more in depth consideration of Making Tax Digital for Income Tax access the on demand recording of the lecture referred to in this podcast.

We have also written a Topical Issue to help you communicate the key changes and requirements to clients, here. 

For more information on this topic and more, please visit www.mercia-group.com for further details.

Transcript

00:00:00:00 - 00:00:31:24

Welcome to another edition of The Mercia Podcast. I'm Helen Knight, Tech's senior manager, and I'm joined today by one of my colleagues, Norman Allison. And we are talking today about making tactics digital. I helped Noam out on a very popular course earlier this week. It's very clear that making that digital is coming and lots of advisers attended that lecture.

00:00:32:00 - 00:01:00:14

They're really seeing the importance of starting to look at their client base, establishing who's going to be in the first chance of making touch digital for income tax self-assessment. So we thought it would be useful just to have a quick podcast on some of the insights and questions raised in that session. In terms of the basics, we've obviously got the phased rollout norm of making tax digital.

00:01:00:14 - 00:01:24:20

So it's going to apply to individuals with qualifying income over 50,000 for 2627 and then being extended for individuals with qualifying income over 30,000 for 2728 and 20,000 for 2829. But we have quite a lot of questions about various nuances to that, didn't we, Noam say?

00:01:24:22 - 00:01:45:24

We certainly did. We had a lot of delegates on that call simply head on earlier, earlier this week. Yes, absolutely. Yeah. One, I mean, one key point, I think the starting point when we're talking about income, this is not profit. This is top line. So it's turnover and or your share of gross rents. So that's the key key point.

00:01:45:24 - 00:02:00:13

If you've got self-employment income and you've got property income is the combined top line income. This is the these thresholds are nothing to do with with profit is it is top line income and what.

00:02:00:13 - 00:02:16:06

Income is relevant for it. So we know it's coming in that the first tax payers from 2627. But how are they judging who's going to breach those thresholds for that first phase okay.

00:02:16:07 - 00:02:46:15

Yep. Good point. Basically HMRC referred to something that I picked up on on one of the conferences back in Leeds back in February, and they referred to it as c y minus two. So in other words 2627 you go back two years and you look at the qualifying income as declared on the 2425 self-assessment return. So you are looking at turnover and or other business income for your self-employment.

00:02:46:21 - 00:03:02:21

And as I say, you were looking at the gross rents or your gross share of rent. So fundamentally, it's the 24 five returns that people are doing at the minute will determine if the client is mandated into MTD in 2627.

00:03:02:23 - 00:03:28:16

Yeah, and that kind of makes sense, doesn't it? Because those 2425 returns are the ones which are going to be submitted to HMRC at and on 31st of January 26, and they're going to have that data tonight. He's in or out. One of the questions that we did have on the lecture was what happens if you're 24, 25 for time.

00:03:28:17 - 00:03:41:14

So you yes, you've got income in excess of 50,000. But for example, your trade slowing down, you don't have income that home future years. Are you still in MTD.

00:03:41:16 - 00:04:11:01

Yeah. I mean basically you are if you if you reached the qualifying limits in 24, 25, you are in. That's that's the fundamental point. The the only situation where you wouldn't be in MTD is if the source of income completely ceased. So I think I use the example of someone who is self-employed in 2425, sees the basis in 2425 and then became an employee in 2526.

00:04:11:01 - 00:04:32:13

Because there is no continuing source of income in 2526, you would not be within MTD. So the basic idea is, yeah, if you meet the requirements in 2425, you are in, even if your income then starts, starts to fall. And that's if that's a very important point. Yeah.

00:04:32:15 - 00:04:37:20

So only real get out is if the business entirely ceases.

00:04:38:01 - 00:04:39:02

Yeah. Yeah.

00:04:39:03 - 00:04:45:07

That's the exact time. What about individuals starting to trade in 2425.

00:04:45:09 - 00:05:06:14

Yeah I think this is something that, you know, people might miss the whole like what the regulations basically say is if you've got an accounting period, let's say less than 12 months, HMRC will in effect pro-rata the limit. So if you've taken on a new client, you know, 24, 25 you've done, let's say they started to trade on the 1st of October.

00:05:06:16 - 00:05:38:11

So you've done a six month set of accounts up to the 31st of March, which many, many will do. And let's say the income on that was £26,000. For example, we may think, oh, we haven't got a problem with this for MTD because, you know, we're way off this £50,000 limit. But the point is, what the regulations say is HMRC will pro-rata the limit so that will basically mean that that six months of 26,000 becomes 52,000 on a full on a full year basis.

00:05:38:13 - 00:05:46:09

So the client would be mandated to end today sooner than you would probably think. And that's one most definitely to watch out for.

00:05:46:11 - 00:06:15:22

Yeah, absolutely. So something really to keep an eye on if you're advising anyone starting to trade, you're mandated to join MTD. One of the implications of that is you need to make quarterly filings and something which I think I didn't fully appreciate to start with is that wast when you're looking at the threshold, you take that title of any property plus self-employment in terms of your actual quarterly filings.

00:06:15:24 - 00:06:23:18

Is that right that those need to be separate filings, that every trade or business that that individual carries out?

00:06:23:20 - 00:06:33:21

Yes, that's absolutely right. So if you've got 2 or 3 different self-employment activities, yeah, effectively you've got separate filings for each of those businesses. Exactly the case.

00:06:34:01 - 00:06:41:15

Okay. What about if you've got multiple properties. Do they each needs a separate filing or can they be dealt with together.

00:06:41:17 - 00:07:04:09

Right. The key thing about properties is that you would it if you've only got UK property income. Yep. And you got various properties. You've just got one filing. If you've also, for example, got an overseas property, you'll have a separate filing for the overseas income income as well. But broadly you've only got one submission for UK and one submission for foreign property.

00:07:04:12 - 00:07:27:10

Sounds like good news for the landlords that there is that that property business as is going to be viewed as a whole, as long as it's sort of all located in the UK, these quarterly updates, then it's a summary of income and expenses. Could you go a bit more into that? And, and how those are built up over the year.

00:07:27:10 - 00:07:28:09

No.

00:07:28:11 - 00:07:57:15

Yeah I mean the start, the starting point really is that the regulations for digital recordkeeping generally say you've got to record each transaction. So date of transaction the amount and categorise the income, income or expense. And if you just think about currently the existing self-employment pages, the categories of income, the categories of expense, and also the say 105 pages, the property pages, the categories of income, the categories of expense.

00:07:57:21 - 00:08:29:09

So yes, there are easements of what we call three land accounts. We'll perhaps mention that a little bit later, but quite simply, everything needs to be recorded. And when you press the submissions, quite simply, you press send HMRC. What it will do is not send every single transaction to HMRC. It will basically say, for example, your total sales for that quarterly update period is X and you'll quote your total motor expenses.

00:08:29:09 - 00:08:48:01

For example, for that quarterly period is Y, etc. and that's what it will do. It will just be sending totals to HMRC matched, as I say, very largely to what the existing self-employment and property pages pay. Not every transaction will be going to HMRC.

00:08:48:02 - 00:09:02:12

So just to pick up on a couple of things you mentioned in that E you first of all set for that period, and it's right that it sort of builds up over time, isn't it. Says quarterly update so accumulative it's that right?

00:09:02:16 - 00:09:26:22

That's absolutely right. When we had the first regulations issued, which were back in 2021, each quarterly period was effectively a standalone period. But they decided it will assist people if if they made errors and they need to correct the errors. If the quarterly update periods are done on a cumulative basis, that will make life a lot more straightforward.

00:09:26:22 - 00:09:34:07

So that's what the revised regulations in 2024 did. It changed. It changed it from standalone to cumulative basis.

00:09:34:09 - 00:09:49:06

And that gives you a bit more of an opportunity to correct any errors then as well, because they'll just be subsumed within that next quarter. Something else you mentioned was was three line accounting. How how do you get into that.

00:09:49:08 - 00:10:19:18

Yep. What this is basically saying if your self-employment activity or indeed your property business is below the VAT threshold, then yes, you have to you have to record each transaction, but you don't have to categorise it. In other words, rather than categorise all the different expenses telephone, motor expenses, sundries, repairs and renewals, etc. no, you can just have one figure.

00:10:19:19 - 00:10:33:04

Effectively, you would just categorise it as income and you would just categorise it as expense. So you is the categorisation that is a lot more straightforward. If you qualify for three line accounting.

00:10:33:06 - 00:11:10:10

Yeah. So I'm sure that would be a welcome simplification for a lot of those smaller tax payers. Interesting that someone mentioned in the course was potentially thinking a bit about flexibility, where you are making multiple filings, for example, because you've got a self-employed trade and you also have a property business because those quarterly filings the the courts as a default based on that tax year, but you cannot lapse for those to be calendar quarter.

00:11:10:10 - 00:11:18:23

So you've got a bit of flexibility to fit that into to how you actually prepay, for example, your business accounts. Tony.

00:11:19:00 - 00:11:41:10

Yes, that's that's absolutely right. I mean, to be honest, when I've done face to face courses on this area over the last year, a lot of people have been telling me, rather than to have the first quarter for self-employment activity run to the 5th of July because they go many 31st of March year and especially post basis period reform, they would elect for a calendar quarter.

00:11:41:10 - 00:12:08:15

So your first quarter would run to the third, the run to the 30th of June and then the 30th of September, September, etc.. So I think personally, I think a lot of people will be making the election to submit for calendar quarters. You need to make the election is probably going to be a tick box on the software before the first quarter is submitted, and you just report to the, say, the 30th of June, 30th September, the 31st of December, and then eventually to the 31st of March.

00:12:08:15 - 00:12:11:19

I think a lot of people will be going down that particular route.

00:12:11:21 - 00:12:42:21

Yeah, absolutely. But there is potentially a choice like as well as using those kind of calendar quarters, it may be possible to use those for a business and the tax year quarters for a property rental, for example. Similarly, you might have a bit of flexibility, could potentially even choose to use different software providers for each of those that are much not add some complexity into agreeing what to file.

00:12:42:23 - 00:13:06:24

Yeah, that that could get a bit complicated. But yes, I mean, as I understand it, you do have you do have this flexibility. As I mentioned on that call, the guidance, I mean, it's been updated. I mean, not on a daily basis, but it is being updated on a regular, regular basis. So it may be that we get some further clarification about that over the next few months.

00:13:07:01 - 00:13:07:18

Okay.

00:13:07:20 - 00:13:23:04

That's great. So we've we've done kind of a bit on quarterly updates. You've made your quarterly updates. And then you need to submit your end of year finalisation to HMRC. Could you talk a bit about that piece? No.

00:13:23:06 - 00:13:45:19

Yeah, sure. I mean the main point is when you're doing your quarterly updates, you don't have to do your tax adjustments. You know, you're at Bakri, disallow a bull's interaction with capital allowances, loss reliefs, etc. all of that is done as part and parcel of the final process. And the key point when you're looking at the final process, that's when you will report any other income.

00:13:45:19 - 00:14:07:18

So for example, your savings income, your dividend income, Pai you make your claim for any pension contributions, etc. that's all part finalisation process. Although the name is going to change, it's known as finalisation as a as at the minute, and that submission must be in by the normal filing date. It's either 31st Jan so that that date hasn't hasn't changed.

00:14:07:23 - 00:14:25:15

It's interesting to sort of think about, isn't it, because it's the same filing date as a regular self-assessment return. It brings in all these other sources of income, but that finalisation might not look like your income tax return. And that's quite software dependent, isn't it?

00:14:25:17 - 00:14:51:12

It is very sudden and fairly recent developments have been reported that data will actually be hikma c doing the tax calculation rather than the actual software. And you you will find you've got to go to a simple Google search. There are reports that are basically saying HMRC are not provided the software companies with the algorithms to do the correct tax computations.

00:14:51:16 - 00:15:14:22

So this is it's appears to be at the minute very much often is HMRC driven the tax calculation. And then fundamentally you have to agree that tax calculation that HMRC have produced, which of course is quite different to what we what we do and under self-assessment of course, but we, we generate the tax liability. We calculate the liable abilities and the self-assessment.

00:15:14:24 - 00:15:35:19

So pretend to that's bringing in another stage of advisers needing to get that clients sign off effectively. So they they sign off on the data that goes to HMRC. And then once they HMRC calculates the tax on that, there's going to be another going back to the client getting their agreement on that liability is.

00:15:35:21 - 00:15:50:02

That's absolutely right. I'm I'm we haven't seen any guidance come out at this stage. You say a lot of this is fairly hot off the press so to speak. But I would imagine we're going to see some guidance, probably by the professional bodies on that over, over the next few months.

00:15:50:04 - 00:16:01:18

So thinking about the next few months, it's obviously coming in from April next year. What what do you think the key steps that advisors should be doing now?

00:16:01:20 - 00:16:20:09

I think the main thing is looking at your client's client segmentation. You're going to have certain clients who are not going to have a problem. There's also a UI illiterate. You might have a group of clients in the middle. They might need a bit of hand-holding. A bit of training, for example, is a bit of an opportunity there.

00:16:20:11 - 00:16:45:13

And then you will have that possibly that final, that third group of clients and you're thinking, oh my goodness, how on earth are they going to cope? They're not going to cope. So it probably means we are going to be doing everything for them. And that's going to mean a lot more interactions with clients. You know, they'll have to make sure they bring all the records in on time for you, which will be problematic for some clients, etc..

00:16:45:15 - 00:17:10:18

So I think it really is just looking at your clients and trying to on an important, so let's say three groups and certainly concentrate on those who need training and those basically you're going to be doing everything for them themself. You may also have some clients so you can apply for a digital exemption from MTD. There are certain circumstances where they can be exempt.

00:17:10:20 - 00:17:15:24

The application process for that should open sometime this year.

00:17:16:01 - 00:17:26:16

Yeah. But in terms of applying for MTD, getting the clients signed up for it, that's already opened this and that, know them even further. 2627.

00:17:26:16 - 00:17:48:14

Yeah, absolutely. Right. And there's I mean, you do this via the generally the agent services account. If you haven't got an agent service account, you're going to need to get one for those. It will copy over existing authorisations. But basically this is on a client by client basis. And there's no bulk up signing facility available okay. It might only take 4 or 5 minutes per each client.

00:17:48:14 - 00:18:08:11

But you know, if you've got a lot of clients that needs to be factored in well in advance of, you know, April next year so you can start signing clients up for MTD, you can for some clients, you can sign up to the pilot, or you can specify on the software that you just want to, you know, want them signed up for 2627.

00:18:08:13 - 00:18:33:15

Thank you, Noam, I think that's been a really a great, albeit whistle stop tour through some of the the key points which were raised in the questions that we were asked in the course of the day. For anyone that is interested in getting a bit more detail, the course that we have been referring to throughout this podcast is available on demand.

00:18:33:17 - 00:18:56:12

And if you would like any assistance with communicating around MTD to your clients, we've also prepared a topical issue which you can use to share with them. So thank you very much, Norm, for joining me today. And thank you to all of you for listening to this podcast.

00:18:56:14 - 00:19:08:23

That's great. Thank you. Thank you for listening to the Massi Podcast. For more information on this topic, please visit Mercia Hyphen Group.