Making Tax Digital (MTD) is a HMRC strategic drive for the UK to become one of the most effective and efficient taxation systems in the world. The focus is to modernise the way businesses and landlords manage their tax affairs, help avoid errors and ensure taxation is correction. 
 
MTD for VAT has been mandatory since April 2019. A delay in the introduction of  
 
MTD for ITSA (Income Tax Self-Assessment) however was announced in December 2022. This is now due to commence April 2026. 
 
In readiness for MTD for ITSA, the planned basis period reform is still going ahead. This means unincorporated businesses, either individuals or partnerships, will have to convert their reporting of results from current year basis to tax year basis from 2024/25 onwards, with tax year 2023/24 being the transitional year.  
 
This initiative does not impact Limited Companies. 
 
This blog will explain in more details what MTD means for businesses plus what exactly Basic Reform is and how businesses should adjust to meet this reporting criteria. 
 
 
 
What is MTD and Who Does It Affect? 
 
MTD for VAT is already mandatory for VAT registered business above VAT threshold of £90,000 (updated from 1 April 2024) plus those that have voluntarily registered for VAT. This means these businesses must keep digital records and submit VAT quarter returns using HMRC compatible MTD software, ie, XERO, Quickbooks. 
 
MTD for ITSA (Income Tax Self-Assessment) originally scheduled to start April 2024 has now been delayed until 6 April 2026. Self-employed individuals, and landlords with income of more that £50,000 per year are required to comply with MTD for ITSA from this date. Those with income of £30,000 to £50,000 are required to comply from 6 April 2027. At present there is no MTD guidance for self-employed and landlords with income less than £30,000. As with VAT, MTD for ITSA will require accounting records to be held digitally and quarterly updates on income and expenditure are to be submitted to HMRC on MTD-compatible software. 
 
So What is Basic Reform and Who Is Affected? 
 
Basic reform impacts sole traders and partnerships only. This reform has no impact on limited companies who can continue to report profits and losses on accounting year end dates other than 5 April. 
 
Currently unincorporated businesses report profits or losses on their income tax returns on a current year basis. This means businesses calculate their taxable profits based on the accounting year end date of their business, that falls during the tax year. From tax year 2024/25 however, unincorporated businesses will now pay income tax based on the profits earned during the actual tax year 6 April-5 April. This is referred to as tax year basis
 
A business is unaffected by the change to tax year basis if it already has an accounting year end falling between 31 March to 5 April, as HMRC considers this acceptable accounting period end for the tax year basis
How Will This Work? 
 
Consider an unincorporated business with a 30 Sept 2023 year end. This is it’s current year basis. On this current year basis the business would report the accounting profit for year ending 30 Sept 2023 in the self-employed individual’s 2023/23 income tax return. Converting to the tax year basis for 2023/24, as now required by HMRC, the profit reported in the tax return will now be made up of 2 portions. 
 
12 mth accounting period to 30 Sept 2023 – standard period 
6 mth accounting period to 31 Mar 2024 – transitional period 
 
2023/24 income tax return will be based on 18 months profit. 
2024/25 income tax return will then be based on 12mth profit: 1Apr24 to 31Mar25. 
 
To assist businesses HMRC has created a calculator to work out their transition profits und the basis period reporting rules. This is for self-employed individuals only however and not suitable for partnerships. HMRC Calculator 
 
To support businesses with this transition HMRC is allowing taxpayers with any additional tax accruing as a result of a longer accounting period, referred to as overlapping profit, to spread this over up to five years. 
 
What Is Overlap Relief? 
 
If a taxpayer commenced their business using an accounting period not aligned to the tax year, there may have been double taxation occurring on initial profits. This taxation is referred to as overlap profits. This overlap profit can now be off set as overlap relief against additional profits generated aligning to the tax year basis in 2023/24. 
HMRC has created a service to assisting businesses to request overlap profit information from HMRC. Complete the on-line form. HMRC response time is 15days. 
 
What Is the Impact If a Business Decides Not to Align to Tax Year Basis? 
 
If a business decides to continue the accounting period on a current year basis that does not align to tax year end, profits will need to be declared profit apportioning across two different accounting year ends. The later accounting period profit portion or loss will to be declared on an approximate basis with required post submission adjustments once the accounting profits have been finalised.  
 
Unless there are valid reasons not to align to tax year basis, for administrative ease it may be simplier to consider aligning the accounting period to tax year end. 
 
 
Talk to us about your Business 
 
If you would like support and a better understanding of how to ensure your is tax efficient and is claiming everything it is entitled to please just call us. As your adviser, we would be delighted to save you time, save your money and help you achieve your business goals. Just complete our contact form here. 
 
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