Chartered accountant Jonathan Bardolph advises on the changes to taxation and how this may affect your business
For aesthetic practitioners in business (whether it be as a sole trader, partnership, or limited company) you will soon be moving away from calculating tax annually to a quarterly submission and payment system. Currently, individuals complete an annual tax return and pay Her Majesty’s Revenue and Customs (HMRC) through payments every January and July.
Payments on account are based on the previous year’s income and business profits. This results in a balancing payment (or refund if the profits are subsequently lower) the following January. The UK government is introducing Making Tax Digital (MTD) for income tax (and later corporation tax) which will change the way tax is administered. Whilst the changes are due in 2023, with the effective dates being dependent on the type of entity you trade as, it is important to organise your aesthetic practice now so when MTD is effective, your practice is compliant and ready on time. Whilst this may be an added layer of administration alongside running a business, there are some useful benefits in complying with MTD early.
The majority of aesthetic practices are either sole trades, partnerships or limited companies. A self-employed individual must maintain accounting records to enable an annual self-assessment tax return to be prepared (or partnership return if trading as a partnership) in case HMRC decide to raise an enquiry.1 The types of records that need to be maintained are predominantly, but not limited to, business income and expenses.2
Many practitioners keep manual records and populate these onto a spreadsheet before sending them to an accountant to enable a tax return to be prepared. Whilst this is acceptable for the purposes of preparing a tax return, it is not going to be sufficient when MTD becomes effective, as the government has introduced this to help businesses and individuals keep up to date with their affairs. MTD for self-employed individuals is effective for accounting periods starting on or after April 6, 2023, for annual business incomes above £10,000. These rules also apply to property income for landlords.3
MTD means that digital accounting records need to be maintained on MTD compatible software and submissions will be made quarterly to HMRC.4 A final tax return declaration will be done at the end of the year for various claims and reliefs.5
For many VAT-registered businesses, MTD is already in operation for submitting VAT returns and has been since April 2019,3 but this is only in relation to VAT (in other words, it does not include corporation tax or income tax currently).
Whether your business is affected by VAT, income tax (and NI) or corporation tax, MTD will become a mandatary requirement over the next few years
It is interesting to note that where a practitioner has been trading under the VAT registration threshold (taxable annual turnover of less than £85,000)6 previously, but becomes liable to register for VAT, they must in addition, comply with MTD for VAT purposes. The rolling taxable turnover test (which is the basis on whether a business must mandatorily register for VAT) should be monitored continuously by practitioners to ensure that either the business registers for VAT on time or does not need to register if the 12-month taxable turnover is not breached.6 Where insufficient records are maintained, or the bookkeeping is not reviewed, late VAT registration penalties can result.9
For businesses trading as limited companies, the government will introduce MTD for corporation tax no earlier than 2026.3 However, there is a good argument to ensure your aesthetic practice uses MTD compatible software much earlier to enable tax planning and cash flow management.
MTD means that digital accounting records need to be maintained on MTD compatible software and submissions will be made quarterly to HMRC
I will outline a scenario which may be relevant to some practitioners. Let’s cast our minds back to the 2019-20 tax year (before the COVID-19 pandemic). For personal tax returns, where a business owner has a March 31 2020 year end (and let’s assume that this is the first year of trade), the income tax, class two and class four national insurance would be due by January 31, 2021, which is 10 months after the end of the accounting period.8 This would also include the first payment on account for the 2020-21 tax year.
If a practitioner waited until January 2021 to prepare and submit the tax return to HMRC,10 the tax liability based on 2019-20 may come as a surprise if inadequate records were maintained and/or no funds were retained for tax. Also, during this point in time, it is possible that had there been funds set aside for tax, these could have been used throughout the year (for general living expenses during the pandemic). Therefore, the practitioner may be unable to pay the tax on time which can result in interest and late payment penalties. This can cause stress for the business owner who would likely have seen a reduction in income during the 2020-21 year as a result of COVID-19 restrictions, but still having to finance the tax liability relating to 2019-20 in January 2021.
Here is the point. If the practitioner was using MTD compatible software (and if MTD was in operation that year), then the tax liabilities would be known much sooner as the submissions were done quarterly throughout the year. This would enable the practitioner to plan finances better as the year elapses. With MTD you pay the tax as you go through the year rather than calculating it retrospectively.
As technology is advancing, it is easier to record income and expenses using mobile phone apps which have Application Programming Interface (API) integration with accounting software. For example, if a practitioner uses Xero, then HubDoc (optical character recognition software) taking pictures of invoices and storing them within the Xero accounting system, this enables the practitioner to spend less time entering data allowing extra time to be spent on other clinic commitments.
It is important to mention that if you have bookkeeping software (which you can research or ask your accountant about) which records income and expense transactions, additional checks need to be carried out (such as bank reconciliations) to ensure that the information being produced is accurate. An example is where a bank feed (which mirrors the transactions in the bank account) needs to be refreshed every 90 days (due to open banking regulations). This is to ensure that there are no gaps and duplicated transactions. Checks must be done on both the profit and loss account as well as the balance sheet, but your accountant or bookkeeper can assist you with this.
For a practitioner to have a bookkeeping system which has reconciled bank accounts, digital copies of sales invoices and expense receipts enables the practitioner to interrogate the software. This could improve the efficiency and potential profitability of your practice and enable tax planning to be done at the time rather than retrospectively, which should be avoided as it can be illegal!
There is an MTD pilot available for individuals wishing to take part early before it becomes mandatory.4 There will be an MTD pilot for companies released in due course, however, you should get advice from your accountant before signing up to ensure that you meet the eligibility requirements and that you have appropriate software. HMRC have a list of MTD compatible software which is updated from time to time as new software becomes available.5
Whether your business is affected by VAT, income tax (and NI) or corporation tax, MTD will become a mandatary requirement over the next few years and in some cases, this is already upon us (if a business is VAT registered). There is the need to move away from manual record keeping to MTD compliant software which not only complies with MTD requirements as they develop, but also provides information to the practitioner, which is relevant, updated, and accurate.
Disclaimer: At the time of print MTD for income tax was due to be effective from April 2023, however a recent announcement from the Government means that this is deferred until April 2024.
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