• Jon Harris

Bite the bullet – Making Tax Digital is coming in 2024

Introducing our longest blog ever – sorry. But this is stuff you need to hear.

If a recent survey conducted by HMRC is to be believed, 60% of you (assuming that you are the core of our readership – self-employed sole traders in the creative or sports sectors) do not yet know that in 2024, the entire methodology of tax reporting in the UK is changing. You’ll be required to report your profits quite differently to how you have done it before.

Like most commentators, we think that 60% is a ridiculous under-statement. If you do indeed know about all these changes, then feel free to save the next 10 minutes and don’t read the rest of this. But if that really is you, we think you are in a tiny, tiny minority.

So here’s what everyone needs to know in summary, with more detail below.

  • You will file your last annual tax return (as you recognise it) during 2024, for the tax year 2023/24. You’ll never do so again thereafter.

  • Instead, you will submit a quarterly return to HMRC (very much like a VAT return) under a new system called Making Tax Digital (MTD), in July (starting in July 2024), October, January and April every year, and then an annual summary or adjustment by the following 31 Jan.

  • You won’t be able to make the quarterly submission through HMRC’s website in the way that you may be used to doing, i.e. by working out your numbers before you login and then simply typing in your results. Your submission will need to be made by software that links digitally to HMRC. (This is the biggest change and the hardest to get your head round. We discuss it in detail below.)

  • HMRC are not going to immediately require you to link your submission to your bank account. They touted that possibility at the beginning, and then they appeared to drop it. But you should consider it now, because i) it will make your life easier, and ii) they’re going to make you do it one day, anyway.

If this short summary has you shaking your head and panicking, then you aren’t alone. The accountancy sector has been puzzling over these changes for a year or more already (they were in fact delayed from a 2022 start, and then a 2023 start because of Covid) and there is plenty of controversy out there about the whys and wherefores.

So you are right to be a little concerned, and even more right to be wondering how exactly you are going to organise yourself to handle the new system. We can promise that we’ll be here, at the home of tax returns for actors, with up-to-the-minute guidance and answers, specially tailored to our sectors.

And, although we of course charge for those that sign up with us as clients (and very much hope that you will too), all our general advice to creatives and sportspeople about these matters is completely free with no obligation, and always will be, as it was during Covid.

Here are some more details in a Q&A format.

Aaaargh…..Why are HMRC doing this?

Because they believe – probably rightly – that it will make income tax reporting quicker, less error-prone, more accurate and more fraud-proof. HMRC’s staffing is greatly reduced in number, and the days of the old tax inspector visiting you with his briefcase to go through your bus tickets are long gone. This change has already been introduced (gradually between 2020 and 2022) for VAT. In our opinion, it has essentially worked OK, and HMRC are pleased with the results.

Some accountants and lobbying groups are vociferous in their criticism of, and opposition to, Making Tax Digital. We take a more pragmatic view. Like any new system, it will have imperfections and teething troubles – all the more so since we talking about HMRC! But we believe it’s here to stay, and everyone is best advised to bite the bullet, get themselves ready for it, and get used to it.

Will I definitely be in the new system?

The new rules apply to all sole traders who earn more than £10,000 income per year from self-employment. We recognise that there are actors who dip above and below that threshold from year to year, and it is still unclear exactly what arrangements will apply to them. Private rental landlords are also in the new system.

Will the new quarterly submission be like the tax return form I have always used?

No, it will be much shorter for most people. It will be simply three numbers in most cases – your income for the quarter, your expenses for the quarter, and your profit (the first number minus the second number).

You won’t pay your tax any sooner – you’ll still pay it on 31 January after the end of the tax year in question. And you will still need to make an annual adjustment, because some kinds of expenses are harder to break up into quarters. Also there might be questions about tax residency or domicile, or moving items from year-to-year, which can only be considered on an annual basis.

So why can’t I just carry on like I’ve done before, only send the numbers to HMRC quarterly instead of annually?

Making Tax Digital’s main characteristic is that your figures are submitted by secure digital signal, as opposed to the old method where you type numbers into a form.

The easiest way to achieve this is to use a specialist piece of software, or an app. There are already many of these on the market, and you may have heard of some or you may be using them – for example Xero, Quickbooks, FreeAgent, Coconut, Counting Up, Sage – there are already many, and there will be more.

All these packages will comply with the new arrangements and if you are already using them, there will be nothing else you need to change. We also know that the SansDrama app, a specialist app for actors of which we have our own version, intends to be compliant.)

If you have not used one of these packages before, you are probably compiling your income and expenses on a spreadsheet; or maybe you are simply writing them down in a cashbook, or collecting receipts in a drawer and writing them up into categories once a year.

The software will do this work better for you. You can use it to categorise all your expenses as you go along. You make life even easier for yourself if you link your bank account to the software – just go transaction by transaction, tapping a category to tell the software what category each expense was. (If you don’t like the idea of linking your personal bank account – which is perfectly understandable – then open a free business bank account, for example with Starling or Tide.)

If you don’t want to do this book-keeping work yourself, you can engage us to do it for you (more on this later).

Do I have to pay for the software packages or apps?

All the software/apps that we know of at present come with a cost. The cheapest and simplest are the Sansdrama app and Coconut at approx. £3 - £5 per month. Some of the packages cost much more (around the £25 - £30 per month mark) but we think these are ‘overkill’ for a non-VAT-registered sole trader.

We have decided to recommend either Xero’s ‘Cashbook’ product, bought through us for about £6 per month, or the SansDrama app, for our non-VAT-registered sole trader clients. We believe they offer the best and easiest all-round functionality and these are the packages that we feel best able to support our clients with.

Some of our clients are already on other packages, or may have their own reasons for preferring other packages, and that is fine with us – we’ll continue to support them.

Will there be any free software?

It seems likely that during 2023, as MTD 2024 gets closer, providers may start offering ‘bridging’ software (so called because it makes a digital ‘bridge’ between your Excel spreadsheet and the HMRC portal). With MTD for VAT, which is already up and running, some of these products have come out, so it stands to reason that they’ll be offered for the new Income Tax returns too.

It seems likely that some of these products will either be free, or very cheap (perhaps £1 or £2 per submission).

We do not recommend these as a solution, and we will not submit quarterly returns for any of our clients in this way. These solutions will be fiddly to use and will have very patchy support. The free ones are likely to be saturated with advertising and we think that they’ll be frustrating to use.

This sucks. I really have to pay more than £50 a year, at a minimum, for something which has been free up till now?

Irritating though this is, our best and most honest professional view of the answer to this question is – yes. Swallow it. If you do, then you will quickly find (as many of our VAT-registered clients who have already switched have done) that the new system is simple to follow, and it helps you keep cleaner records which you yourself understand better. Link it to your bank, and it is much quicker and more accurate than what you are doing now.

If you try to get round all this without committing to a proper package or app, you might save £50, but you’ll spend way more than that in time and frustration.

I don’t make up my accounts to 31 March or 5 April – will I have to change that?

Yes. If you are one of the 7% of sole traders who have a year-end which is not 31 March or 5 April then you will need to change dates. You should urgently take some advice about this because you are very unlikely to make the best choices for yourself trying to work this out on your own.

Accounting4actors has always offered a low flat fee for annual tax returns. Is that staying?

We previously offered two levels of service – the annual tax return, where you do your own book-keeping on a spreadsheet but we compile your tax return; and our full book-keeping service, where you just send us your bank statements and receipts, and we do the rest.

Both services are remaining just as they did – you choose between doing your own record-keeping, or asking us to do it for you.

We will also introduce a middle service level, where you do your own day-to-day book-keeping, but we check your workings each quarter, and we submit your quarterly return for you as well as your annual adjustment.

Our once-a-year service is £249

Our quarterly service is £349

If we do the book-keeping, it’s £449

All our prices exclude VAT and software, and are for non-VAT-registered sole traders. If you are VAT-registered, or if you have a limited company, there are additional complications, so please speak to us.

We’ll give free training events on Xero software to any of our clients who are going to do their own book-keeping.

Well now. This is an awful lot to take in.

We know, right. The good news is…there’s at least 18 months to get ready for it. We’ll be in your face at lots of webinars and presentations, and we are here for all your questions.

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