Making Tax Digital (MTD) for Income Tax is a new system introduced by HM Revenue & Customs that will change how sole traders and landlords report their income. The aim is to modernise the UK tax system by requiring digital record keeping and more frequent reporting of income and expenses.
Who Will Be Affected
Making Tax Digital for Income Tax will apply to individuals with income from self-employment or property above certain thresholds.
The threshold is based on total income from self-employment and property combined, before expenses are deducted.
What Will Change
Under the new system, individuals will no longer rely solely on a single annual Self-Assessment tax return. Instead, they will be required to:
Quarterly Reporting
Under Making Tax Digital for Income Tax, individuals will be required to submit quarterly updates to HM Revenue & Customs throughout the tax year.
The standard quarterly periods follow the UK tax year:
Each quarterly update must normally be submitted within one month after the end of the quarter.
Alternative Quarterly Periods
In some cases, individuals may be able to use calendar quarters instead of the standard tax-year quarters. These periods are:
This option may suit businesses that already keep records based on calendar months or quarters.
Who Does Not Need to Follow Making Tax Digital
Not everyone will be required to comply with Making Tax Digital for Income Tax introduced by HM Revenue & Customs.
You may not need to follow the MTD rules if:
Some individuals may also qualify for an exemption if they are unable to use digital systems due to circumstances such as age, disability, or lack of internet access.
Why Preparation Is Important
Preparing for Making Tax Digital early helps ensure that record-keeping processes are in place before the rules become mandatory. This can reduce the risk of errors, missed deadlines, and potential penalties.
How We Can Help
We assist clients with:
If you would like to understand how Making Tax Digital may affect you as a sole trader or landlord, please contact us for further information.
The Finance Bill 2021 announced that HMRC will extend the scope of Making Tax Digital for VAT to include all VAT registered businesses (including those voluntarily registered) with effect from 1 April 2022.
Between 1 April 2021 and 31 March 2023, companies investing in qualifying new plant and machinery will be able to benefit from generous new first year Capital Allowances.
Under this new measure, for most business equipment purchased, there will be a 130% ‘Super Deduction’ against taxable profits. For new additions qualifying for Special Rate relief, this expenditure will benefit from a 50% first year allowance.
Since April 2019, government regulations mean that self employed people and business owners, including rental property businesses, who are over the VAT threshold, are required to keep digital business records and have to file their VAT returns quarterly using Making Tax Digital (MTD) compatible software.
Meridian are well equipped to help any of our VAT registered business clients and can advise on suitable software available to achieve this.
Capital Gains Tax on Cryptocurrencies
HM Revenue & Customs (HMRC) treats cryptocurrencies not as currency, but as investment assets. This means that most crypto transactions are subject to Capital Gains Tax (CGT).
You may need to pay CGT when you:
How gains are calculated:
Your gain is usually the difference between the amount you paid for the crypto asset and the amount you sold it for. If you received the crypto asset for free, you should use the market value at the time of receipt to calculate the gain.
Income Tax vs. Capital Gains Tax:
Income Tax generally applies only to crypto dealers generating trading profits, such as professional traders or businesses. For most individual investors, CGT will be the main tax to consider.
60-Day Reporting for UK Residential Property Sales
Since 6 April 2020, anyone selling a UK residential property may need to report the sale to HM Revenue & Customs and pay any Capital Gains Tax (CGT) due within 60 days of completion.
Who this applies to:
Key points to know:
The report must include:
This is separate from your annual Self-Assessment tax return. Failure to report or pay within 60 days can result in penalties and interest.
Next steps:
For more information on how this works and what to include in your report, please contact us.
The Off Payroll Working rules exist to cover situations where clients are effectively treating contractors as employees, but choose to utilise their work via their company, in order to avoid paying Employer’s National Insurance. By having these regulations in place, the aim is to ensure workers, who would have been an employee if they were providing their services directly to the client, pay broadly the same tax and National Insurance contributions as employees.
Previously the rules were that the contractor (yourself), working through your own Personal Service Company, was responsible for reviewing the guidance and making the decision regarding your employment status. From April 2021, this is switching round such that Public sector clients and medium or large-sized Private sector clients will be responsible for deciding your employment status as a worker (see below for further requirements). There are no changes to the rules if your client is a small, Private sector client.
If it is deemed the Off Payroll Working rules apply to you, your income received via your Personal Service Company will be subject to PAYE tax and National Insurance Contributions before being paid to your company. This income will not be subject to corporation tax and can be withdrawn to a personal bank account. The income, and associated income tax already deducted, should be included on your personal tax return as employment income.
Public sector clients and medium or large-sized Private sector clients will need to determine your employment status as a worker, subject to the following:
If your client does not have a UK connection (i.e. they are not UK resident or do not have a permanent establishment in the UK), the April 2021 changes to the Off Payroll Working rules will not apply. Your own limited company should continue to consider whether the Off Payroll Working rules apply for your worldwide income for each contract.
You can use the Check Employment Status for Tax service to help you decide if the Off Payroll Working rules apply to a specific contract. The test considers the following issues to establish your employment status:
If your client does have a UK connection (i.e. they are UK resident or do have a permanent establishment in the UK), your client will need to decide if the rules apply, and what your employment status for tax is for each contract. They should communicate this to you via what is called a “Status Determination Statement” setting out and explaining their decision.
If your client determines that your contract is inside the Off Payroll Working rules and so you are a deemed employee for tax purposes, then your client, or the Agency who pays your fees, will also be responsible for deducting Income Tax and National Insurance Contributions before they pay your company.
If your client determines that your contract is outside the Off Payroll Working rules, they will continue to pay your company gross, as before.
If you disagree with the decision made by your client on your employment status for tax, you will be able to raise your concerns through your client’s Status Disagreement Process. All clients are required to introduce a process from April 2021 to allow you to disagree with their decision.
Please note these changes do not affect whether you can continue to work through your own limited company. This will still be possible after 6 April 2021, however the way Income Tax and National Insurance Contributions are calculated and paid may change for some contractors, or some clients/ agencies may change the way they wish to engage you.
Finally, if you work through an Agency, the Agency should take reasonable care when making a decision about whether the Off Payroll Working rules apply and it is not right to rule all engagements to be inside or outside of the rules irrespective of the contractual terms and actual working arrangements.
We understand this is a very detailed and complex area, so if you have any further thoughts or queries, please do not hesitate to contact us.
Some arrangements describe payments for work as “loans” or “advances” rather than salary, aiming to defer or reduce tax. These are known as Disguised Remuneration schemes.
HM Revenue & Customs (HMRC) considers these schemes tax avoidance. Payments are treated as normal income for tax purposes, and HMRC has successfully challenged many cases.
These schemes are often used by contractors, offshore workers, and individuals paid through trusts or umbrella companies. Typically, a portion of income is paid as salary, with the rest issued as a “loan” that is rarely repaid. HMRC treats these loans as taxable income, and the Loan Charge may apply to bring them into charge in a single year.
Potential consequences include additional Income Tax, National Insurance, interest, and penalties. However, notifying HMRC and settling liabilities voluntarily can reduce penalties and avoid further action.
If you think you may have been involved in such a scheme, we can guide you through reviewing your situation and resolving it with HMRC. Please contact us via our Contact page for assistance.