What is Making Tax Digital and how does it affect your tax assessment of non-dom non-UK residents?

Making Tax Digital is the initiative of the UK government to transform the tax system. It is intended to make tax administration more effective, efficient and simpler for the taxpayer.

The compliance was to be implemented by 2023 but now it has been postponed until April 2024.

The initiative to digitise the entire tax system is pioneered by Her Majesty’s Revenue and Customs (HMRC) and it includes most of the businesses, self-employed individuals, landlords, micro-businesses, individual taxpayers, as well as nonresidents and non-domiciled residents.

According to Making Tax Digital, the taxpayers will be sending their tax summaries to HMRC every quarter of the year. Details are being worked out with various accounting software companies to make it easy and seamless for the taxpayers to file their returns online without hiccups.

This is a big push by the government to make tax processing digital and encourage more businesspersons to adopt digital record-keeping. This will make it easier to file returns and prevent businesses from making errors. Avoidable errors in tax calculations cost the exchequer more than £ 9.9 billion in the financial year 2017-2018. Hence, the big motivation behind introducing Making Tax Digital is reducing this gap.

Who all will be affected by Making Tax Digital?

Mostly self-employed or sole traders including freelancers, contractors, and agency workers will need to adhere to the Making Tax Digital compliance. Additionally, landlords who declare their rental earnings via self-assessment will also need to comply with the MTD requirements. Broadly, the following segments will be impacted by MTD

• Self-employed individuals living in the UK.
• UK citizens who get rental income from some properties abroad.
• Those who have a combined income over £ 10,000 (gross income, not net income)
• ITSA (income tax self-assessment).

How does Making Tax Digital affect non-doms and non-UK residents

Non-domiciled people or non-doms (also non-UK residents) are usually those individuals who have their permanent home (domicile) outside the UK. They may not have to pay tax on foreign income. One’s domicile is often decided by the country one’s father considered his permanent home. In between if you have changed your home country to another country, then that country is your country of domicile.

For non-doms, they will need to submit their tax returns as per Making Tax Digital for all the income accrued through UK sources such as salary or income by working in the UK or renting property in the UK, and also crossing the threshold level of £ 10,000 per year.

Non-dorms and nonresidents will also need to comply with the income tax self-assessment rules, but this is only relevant to self-employment and property-related income in the UK.

What about the remittance basis of taxation for non-doms?

Under these pieces of tax calculation, only your UK income and gains are taxed as well as only those foreign incomes and gains that you bring back to the UK.

If you are a non-dom living in the UK and you have used the remittance basis especially between April 2008 and April 2017 there is a possibility that you can cleanse any mixed funds in offshore accounts to avoid paying tax on the foreign income that you want to bring into the UK. You need to talk to an experienced accountant for that.

To make the distinction between the old ways of calculating tax and the new ways, the registrants will need to confirm their domicile status when signing up for MTD for ITSA.

What are the major changes you need to implement on the way you maintain your taxes to make yourself compliant with Making Tax Digital?

One of the biggest changes is that instead of annually filing your returns, you will be filing them quarterly, that is, four times a year.

You will need to prepare your detailed digital records of income and expenses. You will need approved software to upload your financial data to HMRC every quarter. Based on the information you provide, the online HMRC portal will create a summary of how much tax you need to pay. It is mandated that you use a tax software that is MTD compliant. Here is a list of accounting software you can use to make your accounting Making Tax Digital compliant.