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Does Making Tax Digital apply to sole traders?

September 21, 2022
Making Tax Digital (MTD) is officially underway, with its expansion to all VAT-registered business owners in April 2022 marking the complete rollout of the first phase of MTD.

As MTD continues to expand, the number of business owners needing to comply with MTD legislation will increase alongside. But how does MTD apply to self-employed sole traders — if at all?If you’re not sure how MTD will apply to your sole trader business, you’re in the right place. We’ll be breaking down the different phases of Making Tax Digital, the qualifying criteria for each stage and what MTD means for sole traders.

Making Tax Digital timeline

At the time of writing, HM Revenue and Customs (HMRC) has announced that MTD will affect 3 areas of tax: VAT, Income Tax and Corporation Tax.The proposed dates for the rollout of each phase are as follows:
Making Tax Digital timeline from 2019 to 2026
For a full breakdown of what’s set to happen at each stage, check out our guide to the Making Tax Digital timeline.

Making Tax Digital for VAT

The first of the 3 phases of MTD to fully roll out, Making Tax Digital for VAT requires all qualifying business owners to:
    File VAT returns using MTD for VAT compliant software, such as bridging software or accounting software (such as Ember) Store digital records using either accounting software or spreadsheets that can read by HMRC’s systems
When MTD for VAT first rolled out in April 2019, only VAT-registered business owners with a taxable turnover above the £85,000 VAT registration threshold were required to follow MTD for VAT rules. At this stage, VAT-registered businesses who had signed up for VAT voluntarily were still eligible to file paper tax returns.

It’s also worth noting that at this stage, business owners could still copy and paste information from spreadsheets into their online VAT returns. However, copying information over provides ample opportunity to slip up, filing VAT returns rife with mistakes, counteracting the core goal of MTD — to increase the accuracy of tax returns submitted by small businesses and self-employed people.To mitigate this, the government introduced a soft-landing period for business owners to adopt software containing digital links by April 2021 at the latest.
The latest and most recent phase, rolled out in April 2022, expanded the scope of MTD for VAT to encompass all VAT-registered business owners, irrespective of their taxable turnover. As a result, VAT-registered business owners with a turnover below the VAT threshold will need to comply with MTD for VAT rules.

Does MTD for VAT apply to sole traders?

Regardless of the type of business you run, if you’re earning above the VAT registration threshold or have voluntarily registered your business for VAT, you’ll need to comply with MTD for VAT. As a result, all VAT-registered sole trader businesses will need to follow MTD for VAT legislation.

If you’re a sole trader earning above £85,000, you might find your business structure isn’t the most tax-efficient. To see which business structure is best for your business, head over to our Sole Trader vs. Limited Company Savings calculator.

Making Tax Digital for Income Tax

Making Tax Digital for Income Tax Self Assessment — or MTD ITSA — is on the horizon, with the first phase set to launch on 6th April 2024.Under MTD for ITSA, by April 2024 all eligible businesses will need to:
    Be registered for Making Tax Digital for Income Tax Send quarterly updates to HMRC outlining their business income and expenditure for that quarter Submit an End of Period Statement (EOPS) at the end of their fourth quarter summarising business income and expenditure across the year File a Final Declaration with details of all other taxable income by 31st January every year Store digital accounting records using MTD-compatible software

Does MTD for ITSA apply to sole traders?

By 6th April 2024, sole traders and landlords must be registered for MTD for ITSA if they meet the following criteria:
    Are an individualAre registering for Self AssessmentWere self-employed or collecting property income before 6th April 2023Have a qualifying income above £10,000
If you become a self-employed sole trader or landlord after April 2023, you won’t need to meet the MTD for ITSA requirements until you’ve submitted your first Self Assessment tax return. You can, however, voluntarily register your business for MTD for ITSA at any point beforehand.

Making Tax Digital for Corporate Tax

While the exact dates for the rollout of MTD for Corporation Tax is still yet to be confirmed, HMRC has announced that this legislation won’t come into effect until 6th April 2026 at the very earliest.

Does MTD for CT apply to sole traders?

Since sole traders don’t file Corporation Tax Returns, sole traders won’t have to worry about MTD for Corporate Tax any time soon.

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