As part of HMRC’s Making Tax Digital, sole traders will soon be required to complete 4 tax submissions per year instead of 1.
Making Tax Digital (MTD) is a government led initiative designed, in theory, to make tax admin simpler for taxpayers. They started with VAT in 2019 and they’re now moving on to income tax.
It marks the end of the annual tax return as we know it today, and in its simplest form is a new way of reporting your earnings to HMRC on a more regular basis.
Practically, as a sole trader, it means a lot more work as you’ll now need to submit details of your income and expenses to HMRC four times a year, instead of one.
That’s a lot.
But here at Coconut we’re dedicated to making it as painless as possible, and to supporting sole traders through this change (maybe even making bookkeeping enjoyable along the way!).
This change applies to you if you’re a sole trader, a partnership or make income from property, and your income is over £10,000 (before tax).
You’ll have to use a digital product to track your income and expenses
Whilst many choose to do this already, it will become a requirement to keep digital records of all your business income and expenses from April 2023.
You can’t just use any old software though, it needs to be HMRC approved and compatible with MTD. We’re working on this now and we’ll be ready in plenty of time. So if you’re already using Coconut, you’re one step ahead.
You’ll have to submit your income & expenses four times per year, instead of one
Every three months you’ll need to send a summary of your business income and expenses to HMRC. Coconut will help you keep on top of this and let you know when it’s time for another update.
After you’ve sent an update you’ll then be able to see a year to date calculation of how much tax you owe based on the information you provide.
You’ll also need to submit a final declaration annually
This is where you finalise your total business income and expenses for the year as a whole, essentially confirming that the quarterly updates you have sent throughout the year are correct. It also gives you an opportunity to make any adjustments if you need to, and make HMRC aware of any personal income you have or reliefs you want to claim.
Although April 2023 might seem a long way away still, you do need to start planning for it now. It’s a big change and it will take some getting used to.
If you already use a specialist sole trader bookkeeping tool like Coconut then you’re off to a good start. But, if you’re working from home-made spreadsheets or straight up pen & paper then you might want to start testing the waters.
The sooner you start getting into the right habits around digital bookkeeping, the more comfortable and familiar you’ll be with it when the time comes.
No, not yet. Aside from starting to use a digital bookkeeping tool to get into the swing of things (if you aren’t already).
You will eventually need to sign up for MTD for Income Tax via HMRC, but there’s plenty of time yet and we’ll share more information on that as it becomes available.
Get regular content and resources for growing your business!
Take a look at the latest sole trader tax rates for the 2021/22 as well as our advice on how to prepare for the new tax year.
6th April marks the first day of the new tax year. Here's everything you need to know to start the new tax year off right.