Making Tax Digital (MTD) for Income Tax, also known as Making Tax Digital for Income Tax Self Assessment (MTD for ITSA) is a new way for self-employed business owners and landlords to report earnings and pay Income Tax .MTD for Income Tax is part of the government’s wider Making Tax Digital -MTD initiative.
When does MTD for Income Tax begin and who will it affect?
HMRC has advised that MTD for Income Tax will come into effect from 6th April 2024. Self-employed business owners and landlords with a total business and/or property income above £10,000 per year will have to comply with MTD for Income Tax from that date.
Partnerships with individuals as partners will have to follow the rules from April 2025. Limited liability partnerships (LLPs) and partnerships with corporate partners will be required to join at a future date yet to be announced.
Eligible business owners and landlords have been able to sign up to MTD for Income Tax voluntarily since 2018 as part of a pilot scheme.
What are the MTD for Income Tax rules?
From 6th April 2024, all affected self-employed business owners and landlords will need to:
- sign up for MTD for Income Tax via HMRC’s website
- keep digital business records
- use MTD compatible accounting software.
- send quarterly business income and expenses updates to HMRC through the software
- finalise the business’s income in a declaration which confirms that the updates sent are correct, and make any accounting adjustments
- submit this final declaration to HMRC. This will replace the annual Self Assessment Return.
How often will affected businesses have to send digital updates and what will they include?
Under MTD for Income Tax, instead of sending a Self Assessment tax return to HMRC once a year, business owners and landlords will submit quarterly summary updates of their income and expenditure, followed by a final declaration at the end of the year.
Quarterly summaries
Quarterly summaries will include details of the income and expenses for each self-employment and property business during each quarterly period. The standard quarterly periods in each tax year are:
- 6th April to 5th July
- 6th July to 5th October
- 6th October to 5th January
- 6th January to 5th April
Business owners and landlords can choose to submit updates that are based on calendar quarters instead of the standard quarterly periods. The calendar quarters are:
- 1st April to 30th June
- 1st July to 30th September
- 1st October to 31st December
- 1st January to 31st March
The deadlines for submitting quarterly updates are the same regardless of whether the business’s updates are based on standard quarterly periods or on calendar quarters. These deadlines are:
- 5th August
- 5th November
- 5th February
- 5th May
The quarterly updates will give business owners and landlords a year-to-date calculation of how much tax they owe, based on the information provided in the summary.
MTD ITSA timetable
- April 2021: Ongoing small-scale pilot of MTD ITSA.
- April 2022: Majority of businesses now eligible for MTD ITSA pilot.
- April 2023: Transition from current basis period regime to reporting profits arising in the tax year.
- April 2024: Individuals with annual business and rental income over £10,000 start reporting under the MTD ITSA rules.
- April 2025: Some types of general partnerships with annual business and rental income over £10,000 start reporting under the MTD ITSA rules.
What are the digital record-keeping requirements?
Taxpayers will be able to keep their underlying records (receipts and invoices etc) in paper format if this best suits them (ie, there will be no requirement for all of a business’ underlying paperwork to be scanned and included in their digital records). However, the MTD ITSA legislation makes it clear that there will need to be an accompanying digital record for each transaction, with amounts allocated to the relevant income or expense category (broadly aligned to the current income and expense categories on the self-assessment tax return). It is the totals from these categories (but not the underlying transactional data) which will then be reported on a quarterly basis.
There is a limited exception from this transactional record-keeping requirement for retail businesses with a high volume of low-value transactions: these businesses will be able to elect to maintain a single digital record of each day’s gross retail sales instead of recording each sale separately.
HMRC’s aim is for taxpayers to record transactions in as near to real time as possible, to help increase record-keeping accuracy (and ultimately, to increase tax receipts). However, the only timing requirement in the draft legislation is that the digital records for each quarter are created before that quarter’s submission is made (or, where it is made late, by the time at which it should have been made). This will give businesses some degree of flexibility – it will, for instance, be possible to outsource the digitisation process if the taxpayer does not have the capacity (or does not want to) handle it themselves.
If you already use some form of accounting software to keep your business records, then you are already on the way to meeting the MTD ITSA requirements. You should, however, check to make sure that you are recording the right information and that your software can integrate with the software that your adviser is using for tax purposes. If you do not use software to keep records, then now is a good time to start to think about moving to digital record keeping. Moving to a cloud accounting system now will not only make sure that your records are MTD-ready, but could also make it quicker and easier to keep on top of your business finances, for example by pulling information direct from your bank account. There are various cloud systems available at a low monthly cost (in the region of £20 per month), which in our experience, can offer very good value for money when time saved is taken into account.