Making Tax Digital: key facts for sole traders and private landlords

Presented by leading small-business and tax content expert Mark Williams, the brand new Tax Tea Break with GoSimpleTax podcast series is packed with FREE tax tips for sole traders, private landlords and expat Brits. In this,…

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Last Updated: 19th May 2023

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Presented by leading small-business and tax content expert Mark Williams, the brand new Tax Tea Break with GoSimpleTax podcast series is packed with FREE tax tips for sole traders, private landlords and expat Brits.

In this, the sixth and final episode of our first series, Govinder Saimbhi of UK tax authority HMRC provides essential information about key government initiative Making Tax Digital for Income Tax Self Assessment (MTD for ITSA) and explains how it could affect you if you’re a sole trader or UK landlord

Topics discussed include:

● Why MTD for ITSA is being introduced by HMRC. 

● When it will be introduced and who it will affect first.

● How MTD for ITSA will change tax data recording and reporting requirements for many sole traders and UK landlords.

● How you may be able to claim exemption from MTD for ITSA.

● Where you can find out more about MTD for ITSA.


Mark Williams: Hello and welcome to the sixth episode of a brand new podcast called Tax Tea Break with Go Simple Tax. This is the final episode of our six part podcast launch series I speak to tax and Self Assessment experts who share their tax tips for sole traders, private landlords, and others who pay UK tax via Self Assessment

my name is Mark Williams and I'm your host. Hopefully you've made yourself a nice cup of tea. Now each 20 minute episode has its own subject, and in this our six and final episode of the series, you can find out about making tax digital an important government digital initiative that's being phased in, in stages.

It's already affected all that registered businesses and income tax Self Assessment will be next when introduced. It will radically alter how soul traders and private landlords report their taxable income and costs to HMRC. Before we learn about making tax digital from today's guest expert, let's find out how go simple tax could benefit you if you pay tax by a Self Assessment tax returns.

Do they fill you with fear? Self Assessment can be, uh, well taxing

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Mark Williams: It's time to introduce our experts, Giovinder Saimbhi from HMRC the UK's Tax Authority.

Govinder is responsible for raising awareness and making tax digital among UK SMEs and helping them to better understand what working with making tax digital involves and how it could benefit them. Welcome Govinder

Govinder Saimbhi: thank you Mark. Glad to be here.

Mark Williams: Brilliant to have you. In very basic terms, Govinder what is making Tax digital and why is it being introduced?

Govinder Saimbhi: So, making tax digital is a key part of the government's tax administration strategy. It's aimed at transform the current tax system so it's more effective, more efficient, and easier for taxpayers to get their tax right, making tax digital for income tax, self assessment. Or entity for its, as we call it, means that impacted taxpayers will be required to keep digital records of their business transactions and send quarterly updates to HMRC.

We believe that moving to digital integration will eliminate many of the existing paper-based processes, thus reducing errors and allowing impacted taxpayers and their agents to devote more time to running their business. So that going digital makes managing business finances more straightforward.

Millions are already banking, paying bills and interacting online. So going digital with business records and taxes is the next step. It will give businesses more control and better capability to forward plan with their finances.

Mark Williams: Obviously, it's, um, making tax digital, as you say, it's not only gonna impact, uh, vat, it's gonna impact income tax as well.

Vat registered businesses, they've already been impacted by, uh, making tax digital and it was introduced in in two stages. As I say now, all VAT registered UK businesses must comply with, uh, making tax digital requirements. How has that introduction gone Govinder? Has it been a success?

Govinder Saimbhi: Yes, mark, as you said, it was introduced in two stages with, uh, MTD for VAT going live for those with, uh, uh, an income of, uh, above the VAT threshold of 85,000 pounds, uh, in April, 2019.

And then, uh, two years later, all remaining VAT businesses joined, uh, in April, 2021. MTD is important because it helps reduce common errors in business records and returns, and it reduces the amount of tax that is lost to due to errors and mistakes. We know that, uh, more than 2 million businesses have already benefited from making tax digital for v a t, and more than 19 million returns have been successfully submitted.

Through the MTD compatible software. So far, uh, we already have a very buoyant MTD for that software products, uh, market. So we've got over 500 in that space that are available today. We also know from independent research, looking at taxpayers using MTD for VAT, that MTD is achieving its aims and there's a growing body of evidence from research and insight from businesses already operating entity for that.

That shows that these. Businesses see a range of benefits, and these include an integrated approach to business administration and tax, which results in spending less time on administration. And these are the principles that we hope will be carried over into MTD for ITSA.

Mark Williams: And obviously that's very important for people running their own small businesses, that they can save time and things like administering the tax becomes easier.

And then they can concentrate on other things or other aspects of running the business.

Govinder Saimbhi: for sure.

Mark Williams: Okay. So making tax digital for income tax self-assessment was due to be introduced, uh, next year in the first phase, and it was gonna impact sole traders and landlords with taxable income of 10,000 pounds a year.

Now, in late last year, in 2022, the government announced that it was gonna be delayed, um, for two years. So now it won't be introduced till. 2026. Uh, and in that first phase, it will impact landlords and sole traders with taxable income of 50,000 pounds, uh, a year. So what is the reason for the delay and why is the, why has the threshold been increased, Govinder?

Govinder Saimbhi: So in terms of the reason for the delays that we know that. Income tax, self assessment, the population that's going to be impacted is very complex, so, so what we've done is actually broken that down and as you rightly said there, mark those with an income of above 50,000 will be mandated from April, 2026, and we'll then move to those with an income, uh, of more than 30,000 will be mandated from April 27.

And we also want customers who can and want to, can join voluntarily, beforehand if they're ready and want to do that. But the government is also looking at the needs of smaller businesses, so those under the 30,000 threshold. So we are looking at that at the moment, but we are not ma uh, making any mandatory date.

We acknowledge that it's taken longer than anticipated, and we remain committed to delivering MTD for ITSA, uh, um, as a crucial part of the long-term plans. To digitalise and modernise the tax system, but we want to make sure that we get it right. We want to make sure that we land it properly and safely.

Mark Williams: So in that way it doesn't become the problem for businesses, uh, they can just benefit from it.

Govinder Saimbhi: Exactly. There's a wide range of characteristics to the self-assessment population, and it means that. It presents challenges in ensuring that each customer and the agent is adequately supported through this transition. And our aim is to partner closely with the software industry to ensure customers have a range of products that best suits their business needs.

And larger businesses will be the first to be mandated, uh, to use this software for their tax affairs, giving smaller businesses longer time, uh, to prepare. Okay,

Mark Williams: so as you've mentioned, uh, it's going to be introduced in, in, in the first phase in, uh, April, 2026. Um, so how are recording and reporting, uh, habits going to have to change under making tax digital for ITSA Govinder?

Govinder Saimbhi: So, um, yeah, there are a number of changes. So those businesses that are mandated to join mtd, um, ITSA. Will need to keep digital records and replace their paper record keeping habits. They'll need to send a quarterly summary of their business income and expenses to HMRC using MTD compatible software, so that's really important.

We're expecting this to be a simple and straightforward process, and we must remember that HMRC are not asking for quarterly payments. And I just want to be clear on that one because I do get asked that question quite a lot. Um, it's a summary of business income and expenses only. And in return they'll receive, um, an estimate of tax calculation based on the information provided to help them budget for their tax liability.

And at the end of the year they can, uh, add any non-business information and finalise their tax affairs again, using MTD compatible software. And this will replace the need for a self-assessment tax return.

Mark Williams: Great. And, and as you've mentioned, that's going to be very beneficial to a lot of small businesses, knowing each quarter how much tax you are likely to owe.

because it's the classic story that. Many small businesses get to the end of the year, they get hit with a large tax bill that they haven't budgeted for, or they haven't put money away for. So it comes as a big surprise. So part of the advantages of uh, making tax digital is that it gives you that every quarter, you know, roughly how much tax you're going to have.

Govinder Saimbhi: Absolutely.

Mark Williams: Okay. So you've, you've mentioned that it's going to impact sole traders and landlords. What happens if i'm both?

Govinder Saimbhi: It'll be reported in the same way, but there'll be two submissions, one for each of your business activities. So customers will have a range of MTD compatible software, uh, to choose from.

Um, and you're not obliged to use any one piece of software to meet your requirements, nor are you obliged to use separate software packages for different income sources. So it's really about understanding what your needs as a business are. And we do have a really good list, um, o of compatible software on and that can be found by searching for finding software that's compatible with making tax digital for income tax.

So do, do use that list. It's a growing list. So, uh, we are working hard to make sure there's a wide range that's going to be available for when we go live.

Mark Williams: Excellent. Okay. And, and as I understand it, business owners and landlords can use bridging software. So it's software that enables them to use their existing bookkeeping software, but, but they can still report their, their figures to HMRC in, in a way that complies with, uh, MTD requirements.

Govinder Saimbhi: Yes, that's correct. There, there, you know, we are working with software developers to actually make sure that there is MTD compatible bridging software that's available for those that want to use, um, those spreadsheets, et cetera. So do look out for that as well. And the software choices page, um, will help you identify the right software that's available for you.

Mark Williams: Okay, so can people opt out of making tax digital, and if so, on what grounds?

Govinder Saimbhi: That's a good question. And again, it's one I get asked a lot. Although HMRC are mandating the use of MTD, if people or taxpayers are looking to opt out, they'll need to apply for an exemption, as we call it. They'll need to tell us why they can't use the digital services and HMRC will need to approve that exemption.

So each application for an exemption, uh, will be considered on a case by case basis. So examples of why a customer may apply for an exemption include things like age or disability where it prevents them from using the digital services location. And for instance, if this means they cannot get internet access at their home or business address, and if it's not reasonable for them to access the internet at another location.

So, you know, it's another important thing to remember is that. If, HMRCs already confirmed that you're exempt from making tax digital for v a t, for instance, uh, for one of the reasons that I've mentioned above, then you'll not have to apply for an exemption for mtd for itsa if that's applicable to you, that will be automatically carried over to mtd for ITSA you'll get a letter confirming that in due course.

Mark Williams: But if you can't get exemption, if, if someone, neither a landlord or, or a sole trader. Currently maintains paper financial records, then there's no, uh, avoiding it. They're going to have to start using software to, to record their income and costs.

Govinder Saimbhi: Yes, absolutely. And, and we will try and make sure that we've got, uh, a range of support products available to help them to manage that transitional process. So, you know, look out for our webinars, our podcasts, our, uh, our events, et cetera, and, and look out. Look out for what's going on. We'll try and support as much as we can.

Mark Williams: And, and just because you, you have a preference for do using paper books, that's not, not a reason for exemption, is it? Are you just going to have to start using the, the software to record your income and, and costs?

Govinder Saimbhi: Yeah. So let's just explore that a little bit. So you, you, you know, digital records will need to be kept and maintained using entity compatible software so that that's a given.

And customers may already be keeping business records in a digital format using software. However, they need to make sure that their software is definitely MTD compatible and in order to minimise costs to businesses, HMRC is working closely with software developers to ensure free and low cost products are available.

So we're really working hard on that. And all approved, uh, products are listed, as I said on the software choices page. So do have a look at that.

Mark Williams: Okay, so what will the payment deadline be once, uh, making tax digital has been introduced for income tax self-assessment?

Govinder Saimbhi: So payment deadlines will remain the same as prior to M T D.

So for instance, for that it's one month and seven days after the end of their accounting period. And for itsa, uh, it will remain as the 31st of January, the year after the end of the tax year. So, For example, the 22/23 tax year ends, 5th of April, uh, 2023. Uh, but payment isn't due till the 31st of January, 2024.

Mark Williams: Okay, and what about people who are part of an ordinary partnership? When will, uh, making tax digital for income tax self-assessment affect how they record and report tax information?

Govinder Saimbhi: With partnerships, we have given dates in the past, but I will confirm that the UK government will not extend MTD for ITSA to general partnerships as previously announced, uh, for 2025. Um, it does remain committed to introducing MTD for ITSA to partnerships, but at a later date yet to be confirmed.

Mark Williams: Alright, and just let's, um, pick up, let's look a little bit more at the, at the benefits then. So when sort of sole traders and landlords are working with making tax digital for its, uh, uh, requirements, how could it benefit them?

Govinder Saimbhi: Digital record keeping and making regular updates to HM RC are a core part of the design for MTD. Um, we believe that through regular digital record keeping and ready categorisation of income and expenditure within the software, we expect many taxpayers will find their end of year processes much smoother and easier.

The updates will help self-employed individuals and landlords and their agents understand and manage their tax affairs. By generating tax estimates, uh, through their tax accounts. Um, and we've spoken about this before, but this can help plan budgets and cash flows much more accurately. And also through software, there'll be helpful prompts and nudges that will be provided, and this will give an early opportunity to address errors or missing entries.

And these prompts can also help ensure that taxpayer is aware of any reliefs and allowances that they may be entitled to. So that's a good thing.

Mark Williams: And I suppose if you're not already working with bookkeeping software, once you do start working with it, then it, it's, it's a better way to understand your cash flow and your business performance because the facts and figures are there for you to look at.

Govinder Saimbhi: Absolutely.

Mark Williams: Okay. So, um, where can sole traders and landlords find out more about making tax digital for income tax, self-assessment? Uh, presumably, uh, on the HMRC pages of

Govinder Saimbhi: Yeah. Uh, absolutely. We've tried to make sure that everything's contained in one place so you can find more information on MTD for ITSA

Such as the list of software, including free options and check when to sign up, um, how you can do that. For mtd, it's on by searching for making tax digital for income tax. I'd also recommend signing up for the updates on any particular topic you choose. Uh, there is a button at the top of each section on where you'll be prompted to enter your email address.

So, you can keep up to date, keep informed and be prepared.

Mark Williams: That’s wonderful. Really, really great stuff. Uh, all that remains is for me to thank you Govinder, for being such a great guest and for sharing your knowledge and insight with us.

Govinder Saimbhi: You're welcome. Thank you.

Mark Williams: There we have it. So what are the three key takeaways from this episode? Well, introduction of making tax digital for income tax self-assessment has been delayed until 6th of April. 2026, and it will only affect soul traders and landlords with a taxable income of more than 50,000 pounds a year. In the first phase of introduction to the process to comply, you must maintain digital records of your income and costs and send summaries electronically to hm r c.

After every quarter at the end of the tax year, you confirm the figures you've submitted with any accounting adjustments made, and then you make a final declaration confirming any other income received. H M R C will then tell you how much tax you owe. Three, making tax digital for income tax self-assessment can help you to better budget for paying your tax bill each year because you'll have a rough idea each quarter how much tax you owe, and as we've heard, there are many other benefits too.

Hopefully this episode has given you a much greater understanding of making tax digital for income tax self-assessment. You can also head over to the Go Simple Tax website, which is go simple For more information about making tax digital for income tax, self-assessment, and also be sure to visit government website

We hope you've enjoyed this episode and series and that you've learned lots of useful stuff. Please tell others about the podcast and followers and like, and share our social media posts because we really do want to help as many soul traders, private landlords, and expats as possible. As always, thanks for listening.

We hope to be back again soon.

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Blog content is for information purposes and over time may become outdated, although we do strive to keep it current. It's written to help you understand your Tax's and is not to be relied upon as professional accounting, tax and legal advice due to differences in everyone's circumstances. For additional help please contact our support team or HMRC.

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