It’s coming. In April 2024. So why think about it now? Here are the facts and reasons why you should, and soon.
What it is?
VAT registered businesses have been dealing with this for a few years. Now it’s the turn of anybody with a trade, or property income, which together make £10,000 turnover (not profits) or more. It means you have to register with HMRC, and make a return every quarter within 30 days of the quarter end of your property and trading results. At the end of the year, you will send HMRC, a fifth end-of-year statement which effectively is your annual accounts. This has to be done digitally and currently that means you can use a spreadsheet and upload it to the HMRC website, or you can use accounting software.
Why is HMRC doing this?
We think HMRC has three reasons for doing this, but only the first has been made public. The public reason is that HMRC wants to simplify and speed up tax recording for you, and it’s a cost saving for them.
Our best guess for the second reason, further down the line, is that HMRC may well say that if you can record how much you have earned quarterly, you can pay HMRC quarterly. Apart from the cash flow implications, it does mean that your fifth full return after year end will almost inevitably have some adjustments and if profits are adjusted down, you have overpaid and need to get that back somehow whilst explaining why profits have dropped. This brings us to the real issue.
The most important reason for you is the third. HMRC admit there is a £8bn (2018) a year tax gap owing to avoidable mistakes. MTD gives HMRC far more data sooner and therefore far more opportunity to plug this gap by correcting your mistakes, plus potential penalties and interest. Politically, this is a no-brainer. There would be no need to increase taxes to help fill the black hole of public finances, which would upset voters, and we are all supposed to be paying the right amount anyway. It’s an easy win for them. And of course – there is a penalty regime if you get MTD wrong. After all, HMRC would now have “proof” that your bookkeeping isn’t perfect.
What and when do I have to do something?
The £10,000 turnover limit applies to income in the next and following tax year, as that decides for you whether you need to declare for 2024. So we suggest you have to do something now. If you are below this limit in the 2023 tax year, then you can defer this initiative until the tax year exceed it. This needs some discussion and planning. But first it needs good quality information, which is why we suggest you start a year early. It also gives you plenty of time to get used to new ways of working so you don’t immediately fall foul of the new regime.
If you are over the turnover limit, and therefore have to comply, then another discussion is needed about how you will do so. It’s perfectly possible for you to produce your own records, which have to be transaction based, which means no estimates. Everything has to be backed up by something on your bank account and a receipt. As we’ve said, you can use a spreadsheet but getting that into a fit format to upload to the HMRC website could take some time. Using accounting software is generally a lot quicker and is likely to be more accurate and also crucially is likely to reduce the chance of an HMRC inspection. That is simply because it’s complete and HMRC cannot “break the books”, which is their expression for describing something which is incomplete or unexplained in your bookkeeping.
You can use QuickBooks online for this, or Xero or Sage, which are subscription based. If you are a NatWest customer you can get FreeAgent at no cost or you can use Mettle Bank (a NatWest subsiduary) if your turnover is low. Alternatively, you can use Zoho books for free if your turnover is below £35,000.
Use a separate bank account
Don’t use your personal account for any business related entries. Keeping them separate means that HMRC can only look at the business records, and can’t look at your personal stuff unless they can show there are unexplained entries which might be income. Using your personal account also means you will have to record all the personal stuff in your software so that you can show these entries aren’t business, and you need to keep whatever documentation you can. We’ve had clients birthday gifts of money queried by HMRC in the past, and usually there’s no piece of paper to back it up. There are a lot of online bank accounts which are quick to set up and free, so it’s very worthwhile making this differentiation, as it saves you time, money and aggravation.
Balancing books is not enough
Don’t think for one moment that balancing your books will be enough. Only last week we’ve come across an example. Bank has been balanced every month, VAT has been reconciled and paid on time, PAYE has been reconciled and paid on time, but the accounts were wrong. In fact the sales and profits were too high. If you put in a fifth return which comes to less than the sum of the four quarters, that might well trigger a conversation with HMRC.
Eliminate the errors
The figures have to make sense. Either you, or someone, who is on your side has to understand what they mean and why.
Most bookkeepers stop at balancing – they don’t have the technical skills and training to be able to interpret sets of accounts and find errors. We recognise that this error checking is an essential part of work before anything goes to HMRC.
Is there any benefit?
Surprisingly, there are benefits. We have found with the MTD for VAT regime that clients, with some help sometimes from us, have kept their books better and are therefore making better decisions because they are basing those decisions on more accurate up to date information. Equally, having to do four returns to HMRC means that there are four opportunities for planning your tax affairs. We don’t think that you should restrict that planning to just the trade and property income, because all incomes are aggregated to arrive at your tax bill, so it’s useful to including any PAYE income, dividends or anything else.
Also, if this covers all your income, then you won’t need to submit a self-assessment tax return as well.
So it’s not all bad news. But this does need conversations quite soon to decide firstly whether this can be avoided for a year or two, then if it can’t how is it going to be dealt with, and by whom, and when. There are obvious cost implications, but there’s obvious benefits as well. Outsourcing is generally cost effective so that you can get on with what you’re really good at. This might be a good solution for you.
How we can help you
We are all about helping you achieve the best life-work (not work-life) balance for you. We do what you need to keep you on the right side of the taxman, answer all your questions, and make helpful suggestions. Always recognising that your business is a tool for you, not an end in itself. We help you plan to live your best life for longer. Helping you to enjoy the journey as well as the result, and to be happy. An initial chat won’t cost you anything, so phone on 01202 520010 or email email@example.com