Under the requirements of Making Tax Digital (MTD) for Income Tax Self-Assessment (ITSA), individuals who are subject to income tax on the profits of their trade, profession, vocation or property business will be required to keep their accounting records electronically (either using suitable software or on spreadsheets) and file quarterly returns to HMRC with details of their income and expenditure together with any other information that HMRC specifies. A final end of period statement will then be submitted after the tax year to complete the individual’s tax affairs.

Although the frequency of reporting is to change, the timing of tax payments will not and the current system of payments on account and balancing payment by 31 January after the tax year is currently expected to remain in place.

Timetable for MTD for Income Tax Self-Assessment and who is affected

MTD for ITSA was originally expected to be implemented in April 2023 but in September 2021 the government confirmed that it has been pushed back to April 2024 and this will come into force for sole traders and landlords with gross income over £10,000.   All businesses which are in existence immediately before 6 April 2023 will join MTD for ITSA from 6 April 2024, regardless of their accounting period end.

The rules will apply from April 2025 to general partnerships with business or property income that only have individuals as partners.  All other partnerships (e.g. those that have corporate partners and Limited Liability Partnerships) are not required to join MTD for ITSA in April 2025 but will be required to join MTD at a future date which is yet to be confirmed.  

MTD for corporation tax will come into play from April 2026 at the earliest.

Exemptions from MTD for Income Tax Self-Assessment

Income threshold

In order to be within scope, the individual must have total gross business or property income above £10,000 per year.

The threshold of £10,000 applies to gross income or turnover, not profit, and we understand that it applies to the total gross income where the individual or entity has more than one trade or property business. For example, if the individual has £6,000 of rental income and £7,000 of sales from a sole trader business, they will exceed the limit and be in scope.

Digital exclusion

In line with the exemptions for MTD for VAT, individuals should not have to follow the MTD for Income tax rules if any of the following apply:

  • It’s not reasonably practicable for them to use digital tools to keep their business records or submit quarterly returns due to age, disability, remoteness of location or any other reason (often referred to as ‘digital exclusion’).
  • They are subject to an insolvency procedure.
  • The business is run entirely by practising members of a religious society or order whose beliefs are incompatible with using electronic communications or keeping electronic records.

Where any of the above apply, the individual has to apply to HMRC to claim an exemption, with HMRC having 28 days to either grant or deny the application.

We understand that where a business has already qualified for an exemption from MTD for VAT, they will also be exempt from MTD for Income tax.

Other exemptions

The following are also exempt from MTD for ITSA:

  • Non-resident companies
  • Trustees, executors and administrators
  • Foreign businesses of non-UK domiciled individuals.

Reporting requirements

Quarterly updates

All businesses within MTD for ITSA will have to provide quarterly updates of their income and expenses for the following periods, by the following deadlines, regardless of their accounting period end:

 

Period covered

Filing deadline

Quarterly update 1

1 April to 30 June 2024

5 August 2024

Quarterly update 2

1 July to 30 September 2024

5 November 2024

Quarterly update 3

1 October to 31 December 2025

5 February 2025

Quarterly update 4    

1 January to 31 March 2025

5 May 2025

End of period statement

1 April to 31 March 2025

January 2026

Alternatively, businesses can make a 'calendar quarter election' which allows them to draw up quarterly updates to the end of the previous month.  Where this election is made, the quarterly updates will be as follows:

  Period covered Filing deadline
Quarterly update 1 1 April to 30 June 2024 5 August 2024
Quarterly update 2 1 July to 30 September 2024 5 November 2024
Quarterly update 3 1 October to 31 December 2025 5 February 2025
Quarterly update 4 1 January to 31 March 2025 5 May 2025
End of period statement 1 April to 31 March 2025 January 2026

The first quarterly updates under MTD for ITSA will be due for filing by 5 August 2024, and will cover either the quarter ended 5 July 2024, or 30 June 2024 depending on whether a calendar quarter election is in place.

We understand that separate quarterly updates will be required for each trade or property business carried on by an individual.  There is no requirement to make tax or accounting adjustments to the information provided in quarterly updates.

For unincorporated businesses with an accounting period other than 31 March or 5 April, the government plans to simplify the process by reforming basis periods.

End of Period Statement (EOPS)

The EOPS performs a similar role to the current Income Tax Self-Assessment return - i.e., making the required tax and accounting adjustments and finalising the tax position of the business.

The EOPS will, in a similar way to the ITSA return, be linked to the accounting period of the business, and will be due for filing by the normal self-assessment deadline of 31 January following the relevant tax year. The first EOPS required under MTD will be for the first accounting period of the business beginning on or after 6 April 2024.

We understand that a separate EOPS will be required for each trade or property business carried on by an individual.

Further information and guidance

Software

Individuals within MTD for Income tax will be required to use software to keep their records and submit returns to HMRC via their Application Programming Interface (API). 

There are essentially three different types of MTD compliant software:

  • Software packages that can be used to keep digital records and file returns via HMRC’s API.
  • API enabled spreadsheets – spreadsheets with an inbuilt function allowing them to file returns via HMRC’s API.
  • Bridging software which can take return information from an existing spreadsheet and submit this to HMRC via their API.

Where a spreadsheet is used, the relevant data must be digitally transmitted from the spreadsheet or other source where the digital records are kept, directly to HMRC.

This is a huge change for taxpayers and we will be posting regular updates as the date for compliance draws closer. 

By Kelly Davies, Partner

For any other questions, please contact your local Thomas Westcott office.