All VAT-registered businesses in the UK must now meet new reporting requirements introduced as a consequence of Making Tax Digital. If you don’t run a VAT-registered business, Making Tax Digital won’t have affected you so far. You may not have even heard of Making Tax Digital.
However, if you report income and pay tax via Self Assessment, come April 2024, Making Tax Digital is likely to impact you. And the changes that Making Tax Digital for Income Tax Self Assessment (MTD for ITSA) will bring are significant, so finding out more about MTD for ITSA now is recommended, so you’re better prepared and avoid having to pay a non-compliance penalty.
In this guide you can:
- Find out what Making Tax Digital for Income Tax Self Assessment is.
- Discover whether you’ll be affected by MTD for ITSA.
- Learn how MTD for ITSA will change the reporting of taxable income.
What is Making Tax Digital?
Making Tax Digital is an important government digital initiative that is already transforming the UK tax system. Its introduction got underway in 2019 and it will continue in stages until complete. The VAT reporting system has already been digitised and Income Tax Self Assessment is next, before Corporation Tax gets the MTD treatment. Full introduction of MTD across the entire UK tax system remains some years off.
Why is Making Tax Digital being introduced? The government says it wants to make it easier for people and businesses to more easily and efficiently manage their tax responsibilities, while it hopes MTD will prevent basic tax reporting errors that cost the UK many billions a year in lost tax revenue.
Introduction of MTD for ITSA was to start on 6 April 2023, but it’s been delayed for a year until 6 April 2024 in response to COVID-19 and stakeholder groups asking for more time so that businesses and individual taxpayers could better prepare themselves for MTD for ITSA.
Put in very basic terms, Making Tax Digital for Income Tax is simply a new way of using digital solutions to report income and expenses to HMRC every quarter rather than once a year.
Who will be affected by Making Tax Digital for ITSA?
- If you’re a self-employed sole trader or landlord who is registered for Income Tax Self Assessment and you have a gross income of more than £10,000, you’ll need to comply with Making Tax Digital for Income Tax requirements from 6 April 2024.
- Members of ordinary business partnerships who earn more than £10,000 a year must sign up for MTD for ITSA by 6 April 2025.
- You can apply for a MTD for ITSA exemption if it’s not practical for you to use software to keep digital records or submit them to HMRC digitally, for example, because of your age, disability, location (ie poor broadband connection) or another justifiable reason. MTD exemption can also be granted on religious grounds. You’ll need to explain your reasons to HMRC and an alternative solution will be sought.
How will reporting change under MTD for ITSA?
Sole traders, landlords and other Self Assessment taxpayers with taxable income won’t need to submit a Self Assessment tax return each year (unless they choose to report other income from shares, interest, etc, via Self Assessment, although HMRC would prefer you to report all taxable income via MTD for ITSA).
MTD for ITSA requires you to maintain digital records of your taxable income and expenses/costs, update them regularly and send summary figures to HMRC digitally within a month of the end of every quarter.
If you’ll need to report via MTD for ITSA you must use:
- MTD for ITSA-compatible third-party software or
- “bridging software” that allows you to send the necessary information digitally in the right format to HMRC from non-MTD-compatible software, spreadsheets, etc.
At the end of the tax year (5 April), you must submit your “end of period statement” (EOPS) and a final declaration (MTD version of the current self assessment tax return), confirming the accuracy of the figures you’ve submitted, with any accounting adjustments made and any additional earnings reported. HMRC will then send you your tax bill, which you must pay before 31 January in the following tax year. Unjustifiable late submissions or payments will continue to result in penalties.
Should you sign up for MTD for ITSA now?
For some time, some businesses, landlords and accountants have been taking part in a live Making Tax Digital for Income Tax Self Assessment pilot scheme.
You don’t have to sign up for MTD for ITSA. However, you can sign up voluntarily now for MTD for ITSA and start using the service if you’re:
- a UK resident
- registered for Self Assessment and your returns and payments are up to date a sole trader with income from one business or a landlord who rents out UK property.
- You can’t currently sign up if you also need to report income from other sources (eg share dividends).
Need to know! At this stage, it’s probably best to delay signing up for MTD for ITSA, until at least April 2023.The new system is very much in its infancy, with HMRC taking steps to refine it to iron out any issues and provide a better user experience.
Preparation is key, starting to use digital software now to record income and expenses on a regular basis will get you into the routine before MTD for ITSA comes into effect.
As April 2023 approaches you will then be in a better place to decide what software or bridging software will be best for your circumstance/business.
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