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New Rules for Filing Tax Returns in the UK

Andre Spiteri
Business owners reviewing and discussing filing tax return

The government announced Making Tax Digital almost fouryears ago, in the 2015 Spring Budget. But a recent House of Lords Economic Affairs report said the government hasn’t properly assessed how the new rules will impact small businesses. And, it criticised the fact that it’ll be rolled out on 1 April 2019, less than a week after Brexit day.

Here’s a look at how Making Tax Digital could change the way you file your tax return in 2019. We’ll also discuss the chances of the change actually happening.

How do I file my tax return in the UK?

Before we delve into the new rules for filing tax returns, here’s a quick refresher on the law as it stands.

In the UK, HMRC collects most people’s taxes at source via the PAYE (pay as you go) system. That said, you have to file a self assessment tax return if you’re:

  • Self-employed and earn more than £1,000 in a given tax year.
  • Employed, but want to claim tax back on expenses amounting to £2,500 or more.
  • Employed, but collect extra income that isn’t taxed at the source, such as rent from property, commissions, interest on your savings or investments or dividends.
  • Receive child benefit and earn more than £50,000 a year.

You can file your self assessment tax return online, in which case you have up to the 31 January of the following year to do so. So, under the law, as it stands, you have to file your 2019-20 tax return by 31 January 2021.

Alternatively, you can download a self assessment tax form, fill it in and return it by post. And, in this case, you’ll need to file it three months earlier, by the 31 October following the financial year end. So, to file your 2019-20 tax return by post, your paper self assessment tax return would have to reach HMRC by 31 October 2020.

When do I have to pay my taxes?

Your taxes are due when you file your self assessment tax return. So, if you submit a paper return, you have to pay your tax bill on the 31 October following the financial year end. And, if you file your taxes online, you have to pay your tax bill on the 31 January following the financial year end.

But there’s a twist.

If you’re self-employed, you may have to pay taxes twice a year:

  • You have to settle your tax bill on the 31 October or 31 January, depending on whether you file a paper return or online.
  • If your tax bill amounts to £1,000 or more, you also have to make two payments on account — one on 31 January and one on 31 July. These payments are advances on your next tax bill. And they’re usually equivalent to 50 percent of your last tax bill.

Paying tax when self-employed: Example

Let’s say you’re self-employed as a sole trader. You open for business in April 2018.

You do great in your first year. Your2018-19 tax bill adds up to £5,000.

In 2019-20, you do even better than you did in 2018-19. Your tax bill amounts to £6,000.

Both years, you file your self assessment tax return online.

You’d have to pay your taxes as follows:

  • £5,000 by 31 January 2019.
  • Because your tax bill is more than £1,000, you also have to make a payment on account. This is equivalent to 50 percent of your 2018-19 tax bill, that is £2,500. So, on 31 January 2019, you’d pay £7500 — your £5,000 tax bill and a £2,500 payment on account.
  • You have to make another £2,500 payment on account by 31 July 2019.
  • Your tax bill for 2019-20 is due by 31 January 2021. You’ve already made two payments on account, amounting to £5,000. So, you have to pay only the remaining £1,000. This is called a balancing payment. However, you also have to pay £3,000 on account (50 percent of your £6,000 tax bill).

What are the new rules for filing tax returns in the UK?

As its name suggests, Making Tax Digital aims to simplify the process of filing your tax return by taking it online.Eventually, the plan is to make everything digital. Which means that you’ll:

Here’s how Making Tax Digital should work in practice:

  • You sign up for HMRC-approved accounting software and use it to keep track of your income and expenses.
  • Every three months, you send HMRC a summary of your income and expenses through your software.
  • At the end of the financial year, you’ll send a final report that includes any claims for allowances or tax relief.
  • For the time being, payment dates will remain unchanged. Your bill and a payment on account are due on 31 January, and a payment on account is due on 31 July.

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When will the new UK tax return filing rules come into force?

As things stand, Making Tax Digital will come into force on 1 April 2019. That said, you have to file your taxes using the new rules only if you’re self-employed and your business’ yearly turnover is £85,000 or more(in other words, if you’re VAT-registered).

Not all businesses with yearly turnovers over £85,000 will have to use Making Tax Digital, either. Some businesses will have to start using Making Tax Digital from 1 October 2019. HMRC should have told you about this.

If you’re self-employed but aren’tVAT-registered, you’ll have to start filing your tax return using the new rules from April 2020.

How do I prepare for the new tax return filing rules?

Whether you have to start filing your taxes using Making Tax Digital in April 2019 or in 2020, making the switch isn’t as hard as you might think. The main difference between the current position and the new system is that you’ll have to:

  • Keep digital records
  • Invest in HMRC-approved accounting software

If you currently file a paper tax return and keep your receipts in a shoebox, now’s the time to take everything online.Using software will probably involve a learning curve. So, the sooner you grips with your new tools, the better.

If you already keep digital records, you’ll need to check whether your software is HMRC-approved. And, if not, you’ll need to switch.

Some HMRC-approved accounting software programs are:

  • Xero
  • FreeAgent
  • KashFlow
  • Quickbooks

These are all popular accounting programs.

If you’re already using one of them, it means you’re all set for Making Tax Digital. But if you’re not, it’s worth switching, and not just for Making Tax Digital. The first three made it on our list of the best accounting software for small business.

But will Making Tax Digital actually go ahead in April 2019?

Remember the House of Lords Economic AffairsCommittee report we mentioned at the beginning?

One of the key recommendations the report makes is that the rollout for VAT-registered businesses should be delayed for three years — until April 2022. Lord Forsyth of Drumlean, the Economic AffairsCommittee Chairperson put it bluntly:

“Small businesses will not be ready for this significant change to their practices if it is introduced on 1 April, particularly with Brexit taking place three days earlier. The Government must delay its introduction.”

Lord Forsyth of Drumlean, Economic Affairs Committee Chairperson

The House of Lords does have a point.

ICAEW, the Institute of Chartered Accountants in England and Wales, found that more than 40 percent of small businesses do not know tax filing rules are going to change. To make matters worse, only 56% of VAT-registered businesses —who have to start filing according to the new rules this April — currently use accounting software.

More support to delay implementation

ICAEW technical tax manager Anita Monteith says:

We continue to fully support HMRC’s ambition to increase the use of digital technology, but we are concerned that based on these results many businesses are not going to be ready for implementation in April 2019.

“The lack of awareness among businesses about Making Tax Digital is of concern and needs to be addressed: the communications on Making Tax Digital do not appear to be getting through to VAT registered businesses.

“It is also clear that even among businesses that are aware of Making Tax Digital for VAT, many of them have not started to prepare to implement it. Given the need to review existing systems and potentially evaluate, purchase and test new software, this is a worry.

Despite these concerns, it looks like the government intends to go ahead. Which means you’ll need to file your taxes through Making Tax Digital as from April 2019 or 2020, depending on whether your turnover is £85,000 plus or lower.

So, if you haven’t done so yet, now’s the time to take the plunge and invest in HMRC-approved accounting software.

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