The biggest tax change in decades
The accounting year is all about rules and deadlines, but this year we’re counting down to one of the biggest shifts in business reporting procedures since the introduction of self-assessment in 1996.
Making Tax Digital (MTD) represents a fundamental shift in how income is accounted for. Many business owners will have to get to grips with new working methods, digital systems, more frequent deadlines and more costs.
Rackham’s understands how big a shift this is and has been talking and working with clients to help them prepare, including publishing a series of articles.
Firstly, we’re focusing on sole trading business owners who are not VAT registered.
This article is not a comprehensive guide, but it explains the basics of MTD and what it means for you, what you need to do now and offers further sources of reliable information.
Making tax digital for sole traders who are not VAT registered
With the changing start dates for the new financial reporting rules, you may be wondering what to believe, or even be holding out in the hope of yet another postponement.
Let’s be clear, HMRC has stated that there will be no further postponement or delay. Sole traders earning over £50,000 per annum will need to prepare for the mandatory compliance deadline of 6th April 2026.
Sole traders earning over £50,000 per annum
VAT-registered businesses have complied since April 2022, regardless of turnover levels.
The next group are sole traders and/or landlords earning a total gross annual income of £50,000 or more, based on gross income earned in the 2024/25 tax year (tax year ending 5th April 2025).
Sole traders earning over £30,000 per annum
Businesses earning over £30,000 should also prepare for MTD from the following year, with a mandatory deadline of 6th April 2027.
The conditions for sole traders earning under £30,000 are currently under review, with further announcements to come.
Where to begin?
Your first task is to work out your gross income for the tax year ending 5th April 2025. There are HMRC guides to help you work out what’s included in your qualifying income. This includes all sources of self-employed income and any income you receive from property rentals (see the section on sole traders and landlords below).
https://www.gov.uk/guidance/work-out-your-qualifying-income-for-making-tax-digital-for-income-tax]
If your combined earnings for 2024/25 were £50,000 or more, you need to register for MTD now.
https://www.gov.uk/guidance/check-if-youre-eligible-for-making-tax-digital-for-income-tax
Why is this happening?
The government is making all businesses report their earnings digitally and quarterly to give a more accurate ‘real-time’ indication of earnings and likely tax revenues. In theory, it should make the annual dash to meet the self-assessment deadline easier and smoother, as previously submitted quarterly information will already be available.
Year-end reporting will be different with a requirement to submit an End of Period Statement (EOPS) for each self-employed income source and a Final Declaration (replaces the current Self-Assessment tax return).
How to comply with MTD
In practice, this is only achievable by businesses adopting one of three options for submitting their information in a compliant digital format:
- Option 1: Use MTD-compatible software
- Option 2: Use HMRC-approved bridging software to convert spreadsheet-based records into a MTD-compatible format
- Option 3: Use a ‘done-for-you’ service by your accountant or bookkeeper
How much does MTD compatible software cost?
There are costs associated with each option. MTD-compatible software is available on a monthly subscription basis with costs ranging from £7 to £50 per month. Some providers are offering free versions, possibly on a trial basis or as basic versions. Some banks are offering free software to business customers, but you’ll need to check the compliance and compatibility requirements of whichever package you use. Basically, it has to be compatible with the MTD platform, and if you use the services of a financial professional, it has to be compatible with whatever software they use.
It’s your responsibility to comply with MTD and make sure you submit on time.
The biggest change for many business owners will be adopting digital record-keeping. Although many businesses have done this to some extent, such as storing receipts and using invoicing software, this now needs to be used consistently and comprehensively.
All business income and expenses, so that means keeping digital copies of all receipts for materials, services, fully software-based invoicing and income records submitted quarterly in real-time.
Accurate and efficient digital record-keeping is the key.
Managing the new procedures from the business owner’s perspective comes down to how accurately and efficiently you can get to grips with recording business information digitally. For some, this will be far more easily said than done, particularly if you’ve been mostly paper-based until now or are not well-versed in the digital world. If you’ve been using online banking and are proficient with a smartphone, you should be okay with the software. It’s the frequency of reporting and having to keep multiple records that will take time and organisational effort to adapt to.
A different approach
There has to be a shift in mindset from occasional bookkeeping purges to automatic and instinctive updates to your digital records. If you can get into and maintain good practice, you’ll find that MTD does most of the work for you to meet your quarterly reporting requirements and will use this information to prepare the full annual return.
MTD checklist for sole traders:
[ ] Check your income thresholds–combine all self-employment income sources
[ ] Register for MTD
[ ] Digitise your record-keeping
[ ] Test compatible software
[ ] Consider hiring an accountant
[ ] Stay informed
MTD for sole traders who are also landlords
If you’re a business owner and also have rental property, as far as MTD is concerned, you have two businesses and will be required to make separate MTD submissions for each. The software will allow you to enter multiple sets of separate information.
- Income from a sole trading business
- Income from a property portfolio
Digital records must include:
- Property details (if you own one or multiple properties)
- Dates and amounts of income received
- Dates and categories of allowable expenses
Since publishing this article, we’ve also written a companion guide for landlords:
We’re here to help!
We appreciate that some business owners may be overwhelmed by the prospect of fundamental change. We’re committed to helping our clients make a smooth transition to MTD and are also looking at the options for an *MTD package for clients-further information to come.
Don’t get caught out or suffer in silence!
We have a specialist team that can answer your questions or give guidance on MTD. Use our contact form quoting ‘MTD’ in the subject box or call 01482 631700 and ask to speak to our MTD advisor.
https://www.gov.uk/government/collections/making-tax-digital-for-income-tax
