Three months from now, 864,000 self-assessment taxpayers will be pitched into a new digital regime. But most of them have yet to wake up to the reality of what that means.
The clock’s ticking on the 6 April launch of Making Tax Digital (MTD) for Income Tax, which will sweep away the time-honoured reporting ritual of the nation’s army of self-employed professionals.
It will make digital tax filing mandatory, not once a year but five times a year, using commercial software approved by HMRC. Failing to comply with the new digital system will risk fines of up to £3,000 per quarter.
Filing more than 15 days late will trigger fines of 3%-10% of the tax due, plus interest, though strenuous objections recently persuaded HMRC to announce a 12-month pause on the new penalty regime. More than 1m of the UK’s 12m self-assessment returns are filed late, triggering an immediate £100 fine.
Worryingly, almost 40% of sole traders and landlords surveyed by self-employed champions IPSE weren’t aware of the change, and more than a quarter of traders had no idea that using approved software would be a legal requirement.
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MTD, first mooted in 2015 and then postponed in 2020 and 2024, will initially hit all those with a turnover – not a profit – of more than £50,000 a year. Then the threshold drops to £30,000 for the 2025 to 2026 tax year, and £20,000 the following year, pulling about 2 million taxpayers into the digital world.
The accountancy industry approves of more efficient record-keeping. But it says filing a return every quarter, before making an annual return by the following 31 January, will be burdensome for the self-assessed and unproductive.
Fiona Fernie, partner at Blick Rothenberg, says: “This will not change their actual tax liabilities, or the payment dates on which income tax has to be paid. Which begs the question, what is the point of MTD?”
She said obliging taxpayers to pay for their filing appears to fly in the face of the taxpayers’ charter, which promises to “provide services that are designed around what you need to do, and are accessible, easy and quick to use, minimising the cost to you”.
While there is free, simple software on the market, products that can digitise existing spreadsheet data cost up to £15 a month, and cloud-based options cost from £15 to £35 a month. HMRC admits the initial setup cost for MTD, including training, is between £280 and £350, tax-deductible.
It says: “The required quarterly updates are simple summaries that your software generates automatically. Think of it as digital bookkeeping that talks to HMRC four times a year, rather than cramming everything into January for your self-assessment return.”
Photograph by Getty