Q&A: What does Making Tax Digital mean for freelancers?

If you haven’t heard of Making Tax Digital (MTD) you are not alone. HMRC’s move to digital reporting is a massive project but awareness is very patchy, according to a recent survey by IPSOS, even among self-employed people. This is surprising as the new system will be coming in from 6 April 2024 and is expected to affect about 2.5m people.

I’ve been warning creative freelancers about this for five years in my Finance for Freelancers training but most self-employed people I meet are only vaguely aware or completely ignorant about what’s coming down the track.

One possible reason is that digital record-keeping and automated tax reporting seem like something for businesses, and arts freelancers don’t usually think of themselves as such. But anyone registered as a self-employed sole trader is a one-person business in the eyes of the tax office. They are the people who need to start preparing for MTD for income tax now.

Another reason is that this is the fifth delay to MTD for income tax since 2018. Perhaps people don’t believe it will ever happen – IT WILL. So, if you are a sole trader freelancer, read on.

Q: How does this affect creative freelancers?

A: Any freelancer registered as a sole trader with an annual business income – or turnover – of more than £10,000 needs to start thinking about how they will keep track of expenses as they go along.

When MTD kicks in, it will be compulsory to keep records of turnover and tax-deductible expenses in real time. But you’ll also need to use MTD-compatible software, which will report to HMRC every three months at the touch of a button.

Q: How will that work?

You input your income and expenses into the software as you go along and every three months you press a button to upload the information to HMRC.

At the end of the tax year, you make any adjustments or corrections, and add in any other relevant information. You can then submit the final tax return through the software.

Q: So this is like doing a tax return five times a year?

A: Not really. You just tell them turnover and costs as you go along. The final tax return is done at the end of the tax year as now.

Q: Do I have to pay tax sooner?

No. At least not for the foreseeable future. You’ll get your tax bills in the same way as you do now.

Q: Where do I get the software from?

Some people assume the tax office will provide software for free, but that’s not true. HMRC will authorise commercial software providers and you’ll need to sign up to one yourself by April 2024.

There are currently fewer than a dozen software packages on the gov.uk website that are authorised, and you probably haven’t heard of most of them.

There will likely be dozens of software packages that will apply for authorisation between now and 2024. This will include big ones like QuickBooks, Xero and FreeAgent which have all got MTD in their sights.

I’m expecting freelancers in different industries to congregate around software which suits their needs and budgets best. 

Q: But do they cost money?

A: Yes, they do. A one-year subscription for existing bookkeeping software is often more than £200, and this new MTD system will require sole traders to subscribe year on year. That’s a lot of money across the life of a freelance business.

Q: Will I have to be VAT registered too?

A: No. VAT is a separate thing altogether. MTD for VAT is already compulsory for any VAT-registered business. 

MTD for income tax is a separate system, although a lot of ‘cloud accounting’ software will be able to handle both.

Q: But can I ditch my accountant and replace her with an app now?

A: Not necessarily. Although HMRC talks about this software as ‘cloud accounting’, it’s actually ‘cloud bookkeeping’. 

Software companies won’t generally be able to give you accounting advice and, even if they did, they might not know about the intricacies of freelancing in the creative industries which can have some industry-specific rules.

Nevertheless, MTD will be very disruptive to the accountancy industry. If accountants can’t offer much more than bookkeeping services, freelancers may well stop using them, relying instead on the software to guide them. 

Q: Will there be a backlash, riots in the streets and mass disobedience?

A: Well, the Daily Telegraph is apoplectic, as this measured and restrained headline from 2020 demonstrates: “This is the final proof HMRC hates Britain’s self-employed.”

In reality, some freelancers will get used to it quickly and others not. And there will also be some unexpected devil in the detail as more people start to take it up. HMRC has been running a pilot, but it was recently revealed that at one point only nine sole traders were taking part.

Q: Will I have to be a tech whizz to use the software?

A: Many freelancers will adjust easily, as long as they can get online and report the relevant information every three months.

But some older, less tech-savvy freelancers may use this as the excuse to retire. (I’ve met some on my courses.) I have also met some accountants who will retire by 2024 rather than having to get to grips with this new way of doing things.

Q: It’s a government IT system. Will it crash and burn?

April 2024 is the fifth implementation date set by HMRC for MTD for sole traders. The latest delay was because of the pandemic.

But HMRC are gung-ho about it. They say it will bring in more tax. They will also be able to use computers to spot anomalies – quasi-tax inspectors if you like. 

Q: Where do I find out more?

A: There are several online resources with more information:
Overview of Making Tax Digital 
MTD for Income Tax software (very few at the moment) 
IPSOS research into readiness for MTD 

Personal view

I’ve been voluntarily using one of the software packages seeking MTD authorisation for three years now. It’s slick and makes record keeping easy because you can use an app on your phone as well as via your desktop computer. 

I like the facility to take photos of receipts when I’m on the move and link the photo to the expense within the software. The receipt then goes straight in the bin. I even get my software to generate invoices and link to the bank account I use for my business affairs. It definitely saves me time and gives me clearer financial information.

The cost is the issue and will be a very big problem for some freelancers. Many self-employed people make only £1,000 per month according to recent research by smallbusiness.co.uk. They’re unlikely to be able to pay £200 a year just to report tax information. I expect there will be some deals and special offers in place with software providers by April 2024. Some banks have already moved into this space.

Ironically, if MTD for income tax had been in place before the pandemic, HMRC could have supported all sole traders through the Covid income support scheme. Instead, they only supported those who’d been in business for a couple of years, leaving new businesses high and dry. 

David Thomas is a finance skills trainer and founder of David Thomas Media.
 www.davidthomasmedia.com
@dtmtraining

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