The Next Step Towards Digital Tax – Making Tax Digital For Income Tax Self-Assessment

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What is Making Tax Digital?

Making Tax Digital – MTD – is a wide-ranging government initiative that will transform tax administration in the UK. People will be required to maintain their records digitally and submit information more frequently, with the aim of making it easier for businesses and individuals to keep adequate and efficient records of their tax affairs.

MTD covers VAT, Income Tax and Corporation Tax. MTD for VAT was introduced in 2019, and MTD for Corporation Tax won’t start before April 2026. MTD for Income Tax Self Assessment (MTD ITSA) will come into effect on 6 April 2024. It will affect sole traders and landlords with business and property income/turnover (not profit) over £10,000.

Why is MTD being introduced?

The MTD process is being introduced to help people get their taxes right and keep on top of their affairs. It is expected to reduce tax errors.

Here are some of the benefits:

  • Submission of returns through approved digital accounting software will simplify the tax process and help integrate this into financial planning.
  • MTD will help businesses reduce errors in submissions and get it the right first time.
  • It simplifies the workload for taxpayers.
  • Transactions are captured using approved record-keeping software.
  • Businesses are able to engage with HMRC via approved MTD software.
  • Verify and see the creation and submission of quarterly updates for income and expenditure.
  • It enables year-end return finalisation and gives a tax liability overview.

Key requirements

  1. Digital records must be maintained – this can be done using an approved software package or spreadsheets linked to MTD-compatible bridging software.
  2. Digital records can be kept in different formats – some examples include:
  • Scanning receipts.
  • Sending data automatically from your bank account.
  • Using software that issues invoices and records income.
  • Ensure digital records are recorded and preserved.
  • Information or data recorded digitally must be provided to HMRC digitally via an MTD-compatible platform.

The threshold for signing up for MTD ITSA

The sign-up point for MTD ITSA is £10,000 for self-employment and property (rental income).

Eligible groups who can sign up for MTD

The sign-up service is open to the following groups:

  1. Sole traders with income from one business.
  2. Landlords with UK property.

Exemptions for Making Tax Digital

You are not required to sign up for Making Tax Digital or may apply for an exemption if either:

  • Turnover is below the sign-up threshold.
  • You are already exempted from filing Self Assessment returns online.

Making Tax Digital for Income Tax Self Assessment pilot

If you have business income, property income or both, and if you are eligible, you can join the MTD ITSA pilot. This pilot will provide an insight into what MTD ITSA will look like for those with income above £10,000 from 2024.

This pilot is being run by HMRC within a managed environment, with them, software providers and eligible customers working together to identify and resolve issues and improve the customer experience before the system goes live in 2024. If you sign up for the pilot but aren’t happy with your experience, you can opt-out again – but you will have to join in 2024 when it goes live.

How is the income tax pilot delivered?

Under the income tax pilot, both software and hardware costs are allowable deductions against business income when calculating taxable profits.

Businesses and landlords will have to maintain their records digitally and submit information to HMRC via MTD-compatible software.

Updates need to be sent every quarter, and this will generate an estimate of the tax that will fall due. This should help people organise their finances to pay their tax bills at the end of the year.

Please note:

  • There is no requirement to send every transaction as it happens via MTD.
  • People don’t need to submit four tax returns – the quarterly updates are less onerous (but they do need to submit information per income source).
  • There are no changes to payment deadlines.
  • The existing Self Assessment tax return is replaced by MTD.

Payment schedule

There won’t be any changes to payment deadlines (including payments on account) for Self Assessment tax payments with the introduction of MTD ITSA. Quarterly submissions will occur throughout the year, and an End of Period Statement and Final Declaration will be made at the end of the year when tax is also paid. In addition to this, please note that the taxpayer can make voluntary payments throughout the year.

Timeline to sign up for Making Tax Digital for Income Tax Self Assessment

Sign up is currently voluntary, and any business and landlord may opt-in as follows:

  • Sign up for their current or next accounting period, or,
  • Sign up at any point during an accounting period and submit missed quarters to get up to date.

However, it will be mandatory for all businesses and landlords who meet the threshold to be moved to MTD for ITSA before 6 April 2024. If you are eligible, it’s advisable to sign up early and start maintaining digital records to avoid last-minute transfers. This will be a significant change, and joining the pilot will allow people to familiarise themselves with the process.

If you have authorised your returns to be submitted via an agent, they will be responsible for moving you to MTD and submitting them in line with the new schedule from April 2024.

Please note: recipients of any Covid-19 related support payments are not currently able to join the MTD ITSA pilot.

Quarterly summary updates and finalisation

Information that must be provided via MTD software:

  • Income and expenses for each self-employment and property business, submitted at least every three months, as per HMRC’s schedule (the quarterly report).
  • Allowances and adjustments for each self-employment and property business annually, at the end of the accounting period.
  • A summary of the quarterly reports submitted for each self-employment and property business, finalising business income per source, submitted by 31 January following the end of the tax year (the End of Period Statement (EOPS)).
  • A report which pulls everything together and also allows declaration of personal income and claims for tax relief due, submitted by 31 January following the end of the tax year (the Final Declaration).

Deadlines

Three types of submission must be made to HMRC under MTD ITSA: quarterly updates, the End of Period Statement (EOPS), and the Final Declaration. The Final Declaration effectively replaces the current annual Self Assessment tax return. The deadline for EOPS and the Final Declaration is 31 January after the end of the tax year.

The table below shows the periods covered and deadlines for the quarterly updates:

QuartersSubmission PeriodDeadline
1st quarter6 April to 5 July5Aug
2nd quarter6 July to 5 October5 November
3rd quarter6 October to 5 January5 February
4th quarter6 January to 5 April5 May

Additional Benefits

Taxpayers will be able to log in to their tax account and see the reporting periods and deadlines and an estimate of the amount of tax that will fall due.

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