Making Tax Digital (MTD) was first announced by the government in 2015 as its plan to modernise and digitise the tax system. Since then, MTD has been introduced for VAT for businesses with turnover over the VAT registration threshold with effect from 2019, and from 2022 for all VAT-registered businesses. This update focuses on the next stage – the introduction of MTD for income tax self-assessment (MTD for ITSA) from April 2024, which will create new obligations for sole traders and landlords from that date.
Those subject to MTD for ITSA will be required to maintain digital accounting records, and then to submit data from these records to HMRC by way of quarterly updates and end-of-period statements.
The digital accounting records that will need to be maintained will include details (amount, date and category) of each individual transaction. These will need to be maintained either in software that can communicate directly with HMRC’s systems, or in some other software programme or spreadsheet with ‘bridging software’ then being used to extract the relevant data and send it onto HMRC.
MTD for ITSA will be introduced in April 2024 for sole traders and landlords with combined gross income (from either or both of these sources) of more than £10,000.
In April 2025, it will be extended to general partnerships that have only individuals as partners (with limited partnerships, limited liability partnerships and general partnerships with corporate members joining at a later date).
There will be exemptions from MTD for ITSA for:
The exemption for taxpayers who are digitally excluded is available where it is not practical for them to use software to keep or submit digital records or where they are practising members of a religious society or order whose beliefs are incompatible with using electronic communications or keeping electronic records. It will be necessary to make a claim for this exemption to apply.
Quarterly updates will comprise summaries of the income and expenditure of the business for the quarter. The level of detail required will be broadly the same as that on the current tax return, although where annual turnover is below the VAT threshold, it is only the total of all income and the total of all expenditure that need to be submitted. It will not be compulsory to make accounting and tax adjustments as part of these updates.
Quarterly updates must be submitted within one month of the end of each quarter, as follows:
A ‘calendar quarter election’ can be made to allow quarterly updates to be made up to the end of the previous month (e.g. income and expenditure for the period ended 30 June can be submitted by the 5 August deadline).
End-of-period (EOP) statements will show the final taxable profit for the year, and will be due by 31 January following the relevant tax year. These will effectively replace the self-employment or property pages on the current tax return.
Once these rules have been introduced, individuals that carry on a trade or a property business will need to make a minimum of six filings per tax year (i.e. four quarterly updates, one end-of-period statement, and a ‘crystallisation’ process to finalise their overall tax position for the year). Individuals who carry on two businesses (for example, a trade and a property business) will need to make 11 filings per year.
Moore Kingston Smith regularly assists business owners in putting in place digital accounting systems that allow them to monitor their position and performance and to make informed decisions on a timely basis. Either as part of this or separately, we have helped many clients to prepare for MTD for VAT over the past few years. If you would like us to assess your current accounting processes and to advise you on how you can ensure these work for you as effectively as possible – and to ensure you will be ready for MTD for ITSA when the time comes – please get in touch.