ABS Accontancy

Making Tax Digital for ITSA

MTD for Income Tax Self-Assessment (MTD for ITSA) will change how millions of business owners and landlords report their earnings to HMRC.   This change will be the most significant shakeup of Tax legislation in decades.  

Under MTD for ITSA, sole trade businesses and landlords will need to keep and maintain digital records and use MTD-compatible software to manage, track and send updates to HMRC. 

They’ll be required to send HMRC quarterly summary updates of their business income and expenditure.

While you may not have formally kept records up to this point, perhaps only doing so to complete a Self-Assessment tax return, accounting software can offer real-time record keeping ensuring this process is as smooth as possible. And rest assured that while MTD for ITSA will require some work to ensure compliance, the benefits could be significant and help you better manage your tax in the future. 

Making Tax Digital: the story so far

Making Tax Digital is a government initiative that sets out a bold vision for the UK to have “one of the most digitally advanced tax administrations in the world”.    It promises to “transform tax administration so that it is easier for taxpayers to get their tax right”.

The first stage of Making Tax Digital, MTD for VAT, began in 2019.    It first required certain VAT-registered businesses to keep their digital records and use MTD-compatible software to submit their VAT returns electronically.    The scope of MTD for VAT expanded on 1st April 2022, and all VAT-registered businesses are now required to follow these rules.

Business owners and landlords will no longer file an annual self-assessment tax return unless exempt from MTD for ITSA.    Where a taxpayer falls into the MTD ITSA regime, they will need to keep digital records, submit quarterly reports to HMRC, and complete a year-end reconciliation and update process, broadly equating to the current self-assessment tax return filing.

Requirements of MTD for ITSA

Under MTD for ITSA, sole trade businesses and landlords will need to keep and maintain digital records and use MTD-compatible software to manage, track and send updates to HMRC. 

They’ll be required to send HMRC quarterly summary updates of their business income and expenditure.Businesses, self-employed people and landlords will be required to:

  • Operate MTD from 6th April 2024 with their trading and property income chargeable to income tax and Class 4 NICs if their gross income from these income sources for a tax year exceeds £10,000; 
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  • Keep their records digitally (for ITSA purposes only), provide digital quarterly updates and provide their ITSA return information to HMRC through MTD-compatible software.
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Business owners and landlords will no longer file an annual self-assessment tax return unless exempt from MTD for ITSA.    Where a taxpayer falls into the MTD ITSA regime, they will need to keep digital records, submit quarterly reports to HMRC, and complete a year-end reconciliation and update process, broadly equating to the current self-assessment tax return filing.

Do all self-employed people have to go digital?

The short answer is yes. Unless you have an exemption, if you meet the criteria, you must comply with MTD for ITSA if you’re one of 4.2 million taxpayers earning above £10,000 from business and property with an overall income above £10,000.    In that case, This will mean managing, tracking and sending quarterly summary updates of business income and expenditure to HMRC. 

Meanwhile, those earning below the £10,000 threshold can continue using the old HMRC system to file their returns.

What will I have to do under the new rules?

If you’re a self-employed business owner and landlord and you’re affected by MTD for Income Tax, you’ll have to take the following actions from 6th April 2024.

  • Keep records of your business income and expenses digitally.
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  • For each type of revenue (self-employed business or property), send quarterly updates of your business income and payments to HMRC.
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  • Finalise your business income by submitting an end-of-period statement (EOPS) for each source of income, along with a final declaration.
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While you may not have formally kept records up to this point, perhaps only doing so to complete a Self-Assessment tax return, accounting software can offer real-time record keeping ensuring this process is as smooth as possible.    And rest assured that while MTD for ITSA will require some work to ensure compliance, the benefits could be significant and help you better manage your tax in the future. 

How to prepare for MTD for ITSA

Regardless of whether you follow the tax year, you’ll have a digital start date of 6th April 2024. 

While this may feel like a long way away, it’s always worth getting your ducks in a row early. You can do that by signing up voluntarily to get used to MTD rules. You can find out whether you’re eligible for early MTD for ITSA registration here or speak to your accountant or bookkeeper.

If you own multiple businesses, the income earned from all of them contributes to the £10,000 threshold.

Keep digital records

Under MTD for Income Tax, you’ll need to keep digital records of all your business income and expenses, including all your income from self-employment or property. It’s a good idea to start doing this as soon as possible so that you have plenty of time to prepare.

Send quarterly updates 

Once   to MTD for Income Tax, you’ll need to send a summary of your business income and expenses to HMRC every three months using MTD-compatible software

The deadlines for submitting quarterly updates will be the same for everyone who has to follow the MTD for Income Tax rules. From the start of the tax year on 6th April, these deadlines are:

  • 5th August
  • 5th November
  • 5th February
  • 5th May
 

The quarterly updates are due for submission one month after the end of the quarter. There will be no changes to the payment date of the income tax due.

After the fourth quarter, an ‘End Of Period’ (EOP) Statement will need to finalise each business income source. A Final Declaration will also need to include other taxable income sources, such as savings and investment income.

Finalise your business income

At the end of the tax year, you’ll need to finalise your business income by completing an end-of-period statement (EOPS) for each source of income, along with a final declaration that replaces the current Self-Assessment tax return. 

This process lets you confirm that the updates you’ve sent are correct, add details about personal income or reliefs, or make any other necessary adjustments. As with the current Self-Assessment process, you’ll have to submit the EOPS and final declaration and pay the tax you owe by 31st January of the following year.

While it may feel like you have plenty of time to prepare for MTD for ITSA, talk to ABS Accountancy today about how you can get prepared today.

Download our brief guide to MTD-ITSA here.

By taking the time to get used to the digital tools, the transition will be all the smoother.