Making Tax Digital for Income Tax

Making Tax Digital (MTD) is HMRC’s plan to digitise the tax system in the UK. It aims to make it easier for taxpayers, whether businesses or individuals, to accurately calculate the tax they owe, or are due as a refund.

Split into different phases, MTD was first introduced in 2019 for VAT registered businesses with a turnover above the VAT threshold (£85,000). From April 2022, the next phase made it mandatory for VAT registered businesses below the VAT threshold to comply with the scheme.

The next phase of MTD will have a significantly greater impact, as it applies to self-employed individuals and property landlords.

What is Making Tax Digital for Income Tax and Self Assessment (MTD for ITSA)?

Initially due to come into force in 2023, MTD for ITSA was put back to 2024 due to the pandemic.

However in December 2022, the government announced that it would be further delayed until April 2026. This new start date will relate to individuals who have an annual gross income of £50,000 or over from any trade and/or property income. Those with a gross income between £30,000 to £50,000 will have to comply with MTD for ITSA from April 2027.

Depending on their respective MTD for ITSA start date, taxpayers who fall into these categories will have to abide by the following rules:

• Use only MTD compatible software which digitally links from their financial records (e.g. accounts packages or Excel spreadsheets) to HMRC’s MTD Income Tax online platform.
• Submit quarterly digital financial updates to HMRC (as opposed to annually under the current Self Assessment regime).
• Before 31 January each year, review and make any accounting adjustments and allowances.
• Submit a Final Declaration to confirm all income declarations and receive a final tax calculation.

HMRC is currently reviewing the situation as to when partnerships will be mandated to join MTD for ITSA and also how they intend to deal with taxpayers whose annual gross income is between £10,000 to £30,000.

Limited Liability Partnerships and corporate partners will also have to sign up for MTD for ITSA, although HMRC has yet to announce when this will be.

The new process for quarterly income tax filing

The quarterly MTD for ITSA returns will require taxpayers to state their total income and expenditure for that period.

Taxpayers who generate income from both furnished holiday lettings and unfurnished residential lettings and/or who receive income from overseas property, will have to submit separate quarterly returns for each business.

Similarly, anyone who runs their own business, e.g. a hairdresser, and who also receives income from property must submit separate quarterly income and expenditure information for each income stream.

Changes to the self-employed tax year

In addition to rolling out its MTD plan, HMRC will also change the basis period from which income tax is calculated. So all self-employed businesses will be required to move their financial year to coincide with the tax year, i.e. they will need to have a 31 March or 5 April year end date. This will take affect from April 2024, but businesses can change their accounting period before then if they prefer.

How can DWilkinson&Company help you with MTD for ITSA?

For some Self Assessment taxpayers, the changes may sound very daunting. But don’t worry DWilkinson&Company can provide you with as much or as little support as you require.

Whilst the delay until 2026 (for those earning over £50,000) may be welcomed by some, there are many benefits for self-employed individuals and landlords to move to a digital record keeping process before then.

These include:

• Having a better understanding of how your business is performing on a day-to-day basis, not just seeing the historical results at the year end.
• Knowing who owes you money and who you owe money to, so you can better manage your cashflow.
• Being able to make robust business plans with accurate budgets and forecasts, based on having up to date income and expenditure figures.
• Having the ability to make quicker, better informed business decisions.
• Being prepared in advance for the new MTD for ITSA regulations.

We have helped many VAT registered businesses to transition to MTD for VAT, with most finding it to be less onerous than they initially thought it would be. Indeed, many have found having up to date business information has been a great help in making business decisions based on the real-time information they can now access about the performance of the business.

For our clients who will be affected by the new MTD for ITSA rules, we will be able to help you in the following ways:

• Explaining the changes and how they relate to your individual circumstances and what measures you need to take.
• Recommending the appropriate type of MTD compatible software that will enable you to comply with the new rules. This could be a specific online accounts package such as Xero or if you would prefer to use Excel spreadsheets, we can advise on what HMRC approved bridging software to use which will allow you to digitally link your spreadsheets to HMRC’s MTD for ITSA platform.
• Helping you to change your accounting period if you are required to do this.
• Providing training on the set-up and implementation of different MTD software, so that you will be able to do your own bookkeeping in order to file your quarterly and annual returns.
• Taking on board some or all of your bookkeeping tasks so that by outsourcing it to us, you don’t need to worry about it (other than giving us all your invoices and receipts).
• Reviewing your End of Period Statement and calculating what adjustments need to be made for the allowances and reliefs that you can claim.

We can do as much or as little as is required to help you make the transition to MTD for ITSA. However, the key to making this change as seamless as possible is to start the process sooner rather than later.