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MTD D-Day has arrived – here’s how to make sure you comply
Anyone filing VAT returns from April 1, 2022 onwards now has to file their return digitally as HMRC’s Making Tax Digital reaches its next phase.
All businesses registered for VAT – even if they have turnover below the threshold – must file their returns this way from now on. The premise for changing to the MTD regime is to reduce the number of common mistakes made, according to HMRC, and will save taxpayers time when it comes to managing their tax affairs.
However, it is also a key plank of digitising the UK’s tax regime, and MTD is likely to have increased revenue to HMRC thanks to reduced errors in both 2019 and 2020, said HMRC.
Sign up now if you haven’t yet
Nearly 1.6m taxpayers had already joined MTD for VAT as of December 2021, and more than 11m returns have already been submitted this way. Around a third of those businesses with a turnover below the £85,000 VAT threshold signed up before April 1, 2022 and “thousands more are signing up each week”, said HMRC.
Lucy Frazer, Financial Secretary to the Treasury, said: “Businesses using MTD are saving time on their tax affairs, streamlining their processes, and boosting their productivity as a result.
“[This is] our first move towards a modern, digital tax service – MTD makes it easier for businesses to get their tax right first time. There is a range of support and information available for those that need it – including accessible online content such as YouTube videos, GOV.UK help pages and HMRC’s Extra Support service.
“Agents can sign up on behalf of a business, although businesses remain responsible for meeting their VAT obligations. Those who do not join may be charged a penalty for failure to do so.”
Businesses must sign up before they send their next VAT return
Any businesses that have not yet signed up need to before they file their first VAT return after April 1, 2022. There are a number of software options that can be used, including free options for the easiest of calculations, or more advanced for more complex affairs, said HMRC.
There are some exemptions
Some VAT-registered businesses can receive exemptions, primarily where it is not reasonable or practical for them to use digital tools for their tax. These include reasons based on age or disability, or a religious objection to using computers. But any other reasonable basis for exemption will be considered by HMRC. You can find more information on whether an exemption may apply on Gov.UK.
While you are waiting for a final decision, continue to file your returns as you usually do.
MTD for income tax 2024
MTD is being extended to 4.2m income taxpayers who are landlords, sole traders and partnerships from 2024. Anyone with business and/or property income over £10,000 will be brought into the regime then. So, it is worth starting to plan ahead with your accountant to make sure this transition is as smooth as possible.
Please get in touch with us to find out how we can help you if you are yet to sign up for MTD. We can help you comply with the new rules.
Basis Period Reform – what it is and how it could affect you
Unincorporated businesses – including sole traders, trusts and those businesses working as partnerships, and anyone else that pays tax on trading income – face a major change that will affect the way and the time they are taxed on their profits.
The so-called Basis Period Reform will ultimately take effect from the 2024/25 tax year, but sole traders and other organisations need to start thinking about how this change could impact them sooner rather than later.
The 2023/24 tax year is going to be a transitional period, and the new rules will change the time that underlying profits or losses become subject to tax and bring forward when tax due on profits needs to be paid.
The aim of the rule change, which was set out initially in the Finance Bill 2022, is to remove complexity relating to basis periods and overlap profit, and make sure tax payments are made closer to when profits are generated.
Implementation has been delayed by a year
Originally, the changes were due to be made a year earlier, but after a consultation period the Government delayed the proposals to allow taxpayers to prepare for the transition to the new basis period.
New end-of-year account period
The change will move the taxation periods for all sole traders, partnerships and trusts from dealing with tax on an accounting-date basis ending in a tax year, to taxing profits on these businesses that arise in a tax year.
For the 2023/24 tax year, there will be additional tax liabilities on the additional profit to be taken into account. Any taxpayer or organisation in this position should plan ahead for these additional bills that will be coming sooner than might have been expected.
Difficult for international partnerships
There are some difficulties that remain, particularly for large international partnerships that cannot change their accounting date to match the tax year, according to the ICAEW, which is engaging with HMRC to explore the possibility of additional changes being introduced to mitigate these problems.
If your business has an accounting year date ending outside of March 31 to April 5, then you need to pay attention. You will have two elements to be considered for taxable profits:
- The standard part which covers the full 12 months of trading in the transitional year based on your existing basis period.
- Plus, the transitional part of the profits which go directly from the end of the basis period end up until April 5, 2024.
|A business has a 12-month accounting period ending 30 April 2023. In the 2023/24 transitional year it will recognise:|
|The profits arising in the 12-month period ended 30 April 2023 (the standard part).||The profits arising in the period from 1 May 2023 to 5 April 2024 (the transitional part).|
If any business has overlap profits, these must be offset against the profits of the 2023/24 tax year, according to the ICAEW.
There are many other aspects to consider with this transition, including how to deal with losses in the 2023/24 tax year, and whether it will be possible to spread these transition profits across five tax years to help with cashflow, although this could impact on any credit claimed for overseas taxes.
We can help you
This is a very complex area and if you are affected by this, you should contact us so we can help you navigate this change in good time, and with the least amount of difficulty.
Use up your tax allowances early in the tax year
If you are one of those people who is always racing to use up your tax allowances, such as Individual Savings Accounts (ISAs) at the last minute before the end of April 5, then you are not alone. But you could be making a big mistake.
When it comes to mopping up tax allowances, it is best to use your allowances at the beginning of each tax year than the end. If you have not managed to use all or any of your allowance coming up to April 5, well, it is better late than never. But if you can take advantage of using your ISA allowance, for example, at the start of the tax year, then you will benefit from an additional year of investment growth.
Benefit from an extra year of growth
It may not seem like it matters that much, but that extra period of growth – assuming markets rise over the year – will add up over time. Even if the markets dip, the adage ‘it’s about time in the markets, not timing the markets’ still holds because trying to time the market is usually not a good idea.
In addition, you get a full year of growth that is free of capital gains tax and free of income tax. By holding your assets outside of an ISA for the year, you could face a tax charge on any dividend payments from equities.
Early use gives other benefits
Starting to use your allowance at the start of the tax year also gives you other benefits. You can choose whether you put the entire £20,000 allowance into your ISA in one go, or whether you ‘drip feed’ money into the market over the full 12 months.
The latter can be an effective method to help smooth out ups and downs in the stock market, known in the trade as ‘pound-cost averaging’. Let’s take an example of you putting money into a unit trust. If you are buying units every month with the same amount of money, you will be buying more or fewer depending on the value of the units you are buying that month.
Market performance is affected by a range of factors
These values will go up and down depending on a number of factors that impact the stock markets – everything from political will to social and economic changes.
The same principle applies to your pension allowance – most people can put up to £40,000 a year into a pension and get tax relief – if you can put money aside to go into your pension each month, you are benefiting from the same investment smoothing process outlined above.
The other drawback of waiting until the end of the tax year to use your allowances, is that you are forced to put a lump sum into markets at what could be a terrible time. So, giving yourself a head start means you can benefit from the highs and the lows over the year.
Let us help you
If you want to find out more about how you can benefit from your ISA and pension allowances by taking action early, get in touch with us now and see how we can help you.
Payments on account due July 31
Some taxpayers must pay a tax more than once a year, and if this is you then you are facing a second tax bill before July 31.
Those exempt from making a payment on account in July include those who had a self-assessment tax bill of less than £1,000 for the previous tax year, or if you have paid more than 80% of your tax bill through your tax code or your bank has deducted interest from your savings.
It is easy to forget the July 31 deadline
While most of us think of the January 31 payment deadline as the main one, it is easy to forget that there is another payment due on July 31 – and now is the time to consider how much you need to have set aside to cover it.
How the payment on account works
Your bill for the 2020 to 2021 tax year is £3,000. You made two payments on account last year of £900 each (£1,800 in total).
The total tax to pay by midnight on January 31, 2022 is £2,700. This includes:
- your ‘balancing payment’ of £1,200 for the 2020 to 2021 tax year (£3,000 minus £1,800)
- the first payment on account of £1,500 (half your 2020 to 2021 tax bill) towards your 2021 to 2022 tax bill
You then make a second payment on account of £1,500 on July 31, 2022.
If your tax bill for the 2021 to 2022 tax year is more than £3,000 (the total of your two payments on account), you’ll need to make a ‘balancing payment’ by January 31, 2023.
We can help you meet your obligations
If you have to make a payment on account, then please get in touch with us soon so we can let you know how much it is going to be to help you ensure you have enough money set aside to make the payment.
Get a business health check at the start of the tax year
Using up personal allowances is not the only reason you should see your accountant at the start of the tax year, it is also the best time to get a health and wealth check for your business too.
The end of the tax year is the busiest time for your business and your accountant, meaning devoting time and effort to checking whether your business is on track is sadly lacking.
Take the time while you have the time
However, the complete opposite is the case at the start of the tax year, so now is the time to make the most of the chance to review your business strategy, cashflow and plans for the coming year to ensure your company has the best chance of success.
What can your accountant help you with?
Your accountant is perfectly placed to help you put an effective plan in place to give your business the boost it needs at the start of the tax year. He or she can help you with everything from saving tax and paying the right amount of tax, right the way through to helping you comply with relevant regulations and improving your cashflow.
A good accountant can also help you access relevant funding – whether that is a grant that your business would qualify for or an investor that would help your business to grow.
Setting out an effective business plan at the beginning of your financial year is like creating a road map for the coming months, allowing you to follow that map to achieve your goals.
We can help your business run smoothly
When things get tough, your accountant is there to help you with everything from advice to reality checks so your business can continue to run smoothly.
If you want help to set your business on the right path for this tax year, then please get in touch and find out how we can help you.