There are just six months until Making Tax Digital (MTD) for Income Tax becomes law and many sole traders are not fully prepared for the changes ahead.
Concerns around a lack of preparation are highlighted in a recent survey conducted by IRIS which found that 45 per cent of UK sole traders do not feel ready.
This is further heightened by the potential risk of receiving a fine for not following the new regulations.
As a sole trader, you need to ensure you understand the changes coming into place and put measures in place so you can meet your legal obligations.
Who will MTD for Income Tax apply to?
MTD for Income Tax will apply to any individual who files a Self-Assessment tax return.
Taking effect from 6 April 2026, you will need to follow the new regulations in place if your income exceeds the £50,000 threshold.
The threshold reduces to £30,000 from April 2027 and then to £20,000 from April 2028.
What does the penalty system look like?
Persistent non-compliance with the MTD for Income Tax regulations can see fines add up very quickly.
There is a new system in place from HM Revenue and Customs (HMRC) that it will follow should Self-Assessment taxpayers fail to meet their submission deadlines.
Under the new system, there will be no penalty if the tax is paid within 15 days of the due date. There is a three per cent penalty for payments made between days 16 and 30, the penalty is calculated on the outstanding balance.
The percentage doubles to six per cent when late submissions reach day 30.
If a Self-Assessment taxpayer surpasses 30 days, an additional penalty starts daily at 10 per cent per year, accruing until the outstanding debt is paid off.
However, the continuous build-up of fines can stop if you agree to a Time to Pay arrangement with HM Revenue and Customs (HMRC).
What else do you need to know?
As well as handing out fines for continued late submissions, HMRC can fine Self-Assessment taxpayers a significant fine of up to £3,000 if they fail to maintain their records effectively.
As it will be your legal obligation to keep digital records of all accounting, if HMRC finds records are not up to standard, this will be taken into consideration when deciding the severity of the fine.
In addition to this, HMRC can issue fines if information has been deliberately left out of your submissions.
Fines for that start at £300, so it’s important you share all the required information and use a competent digital software provider to submit your information on time.
Ensure you are prepared for MTD for Income Tax, contact us to start preparing.
