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Making Tax Digital for Income Tax Self Assessment (ITSA)

Updated: Oct 14



Delay to MTD for ITSA announced


The government has agreed to delay MTD reforms to the tax system by one year.


Lucy Frazer, the Financial Secretary to the Treasury, announcement to parliament on 23 September 2021 that the introduction date of Making Tax Digital for Income Tax (MTD for ITSA) for individuals has been delayed once again. It will now start on 6 April 2024, rather than 6 April 2023. General partnerships will be postponed joining MTD for ITSA until 2025.


The statement said "We recognise that, as we emerge from the pandemic, it’s critical that everyone has enough time to prepare for the change, which is why we’re giving people an extra year to do so. We remain firmly committed to Making Tax Digital and building a tax system fit for the 21st Century”


On the same day, secondary legislation was published.


Plans regarding a reform to basis periods, which allocate accounting periods to tax years, will now not take place until April 2024 at the earliest. The transition year would now be 2023/24 rather than 2022/23. A statement on whether the reforms will be dropped completely is expected in the October 2021 Budget.


All sole-traders and individual landlords who are in business on 5 April 2023 will have to follow the MTD regulations from 6 April 2024 if their gross turnover exceeds £10,000 pa.


When reading the original article below, please bear in mind that dates will need to be advanced by one year i.e. from 2023-24 to 2024-25 and from 6 April 2023 to 6 April 2024.


The MTD start date for small businesses was first planned to be from April 2018.


Original article


This blog is based on the guidance produced by HMRC, the draft legislation and various consultation documents. It is expected that the final regulations for MTD for Income Tax Self Assessment (MTD for ITSA) will be published in August 2021.


Introduction to Making Tax Digital (MTD)


Several years ago, one of the big announcements in the Budget was that Tax Returns were going to be abolished. What the announcement did not state was what would be implemented in its place.


Over the next few years, HMRC will be introducing some major changes in how taxpayers notify them of untaxed income. This will principally affect businesses and landlords. It will not affect employees, who already have tax deducted at source through PAYE.


H M Revenue & Customs still need to be provided with details of any untaxed income. This is where the radically ‘improved’ and highly technological systems will take over from the annual Tax Return. The new system will be known as Making Tax Digital, colloquially known as Making Tax Difficult.


What is Making Tax Digital?


Making Tax Digital is the UK government’s flagship programme to improve and enhance the efficiency and simplicity of tax administration for businesses and customers. The changes apply to a wide range of taxpayers, including most businesses, self-employed people and landlords, as well as individual taxpayers.


What’s coming?


It’s around 18 months before the start of MTD for ITSA. The changes are probably more significant than the introduction of Self Assessment back in 1997.


Please do not underestimate these changes. These changes, with MTD, will require changes by the self-employed and landlords on a day to day basis.


Taxpayers currently prepare a single Self Assessment Tax Return. However, in future they will have four Quarterly Updates, an End of Period Statements (EOPS) and a year-end Finalisation Declaration Statement.


Plastic bags and cardboard boxes full of receipts and bank statements will have to become a thing of the past. Accounting and tax data will have to be created electronically and flow electronically from your underlying accounting records to HMRC each quarter.


Rather than preparing and submitting an annual set of accounts and Tax Return each year, people will have to move to quarterly submissions. These must be made electronically through software. The data must feed directly from the day-to-day records through to HMRC without any manual interaction, re-keying of totals and amounts etc.


It looks as if this is going to create enormous profits for the software industry and create untold headaches for the average small business owner and landlord.


We think the changes are going to affect the smaller businesses and landlords far more than the larger businesses. The main reason is that the aforementioned generally do not have digital records and do not have special software that can take those digital records and electronically submit the information to HMRC.


What are the basic requirements for MTD for ITSA?


There are four requirements for MTD for ITSA

  • record business transactions in a digital manner

  • preserve those records for the defined period

  • provide four quarterly update to HMRC

  • provide an end of period statement (EOPS) to HMRC for each business


The records in the first two bullet points will be used to prepare the submission in the third and fourth bullet points, which must be submitted using MTD-compatible software.


A final declaration must be submitted no later than 31 January following the end of the tax year to finalise the tax year and to provide any other (non-property and self employment) income, gains and reliefs.


Who will be affected by MTD for Income Tax in April 2023?


MTD for ITSA applies to businesses and landlords with aggregate income, not profits, over £10,000 pa from:

  • Self-employments (but not ‘self-employed’ limited companies)

  • General partnerships (with no corporate partners)

  • Property businesses (UK and overseas)


These businesses will need to follow the rules for MTD for ITSA from their first accounting period that starts on or after 6 April 2023.


The £10,000 threshold


The £10,000 turnover threshold is calculated per person for property income, but per business for the self-employed, rather than based on net profit. The number of properties has no impact on the number of submissions to make. However, formal active business partnerships, rather than just passively managed jointly held property, are different.


Landlords will submit:

  • Four quarterly updates covering the income and expenses of all properties.

  • An End of Period Statement with any adjustments to the net profit or loss for the period.


A partnership with gross turnover of over £10,000 must comply with MTD for ITSA. It is the partnership that will have to make the four quarterly and the end-of year submissions, rather than the individual partners. The partnership income of the individual partner is not classes as ‘qualifying income under the MTD rules. The nominated partner in the partnership will be responsible for complying with the MTD for ITSA rules.


Bill and Ben run the Flower Shop part-time as a partnership. Their annual turnover from the partnership business is around £9,500. The turnover and resultant profits are allocated equally between the partners. As the partnership’s gross turnover is below the £10,000 threshold the partnership does not have to register for MTD for ITSA.


Bill and Ben also rent a property and receive gross rents of £9,000 each. Although Bill and Ben each have total income from self-employed trading and property rental of £13,750 pa, they do not have to follow the MTD for ITSA rules on their property income. This is because their partnership income is not treated as part of their income under the MTD gross income/turnover test.


Multiple businesses, each below £10,000 but which collectively exceed the threshold


The threshold relates to the sum across all businesses, trades and rental properties that would normally be included in a Self-Assessment return and should be used to assess whether a person is within the scope of MTD for ITSA.


Qualifying income below the £10,000 threshold and preparing a Self-Assessment Tax Return


If an individual receive £9,000 of property rental income and £2,000 from self-employed then they will be required to use MTD for ITSA, as aggregate gross income from property and self-employment income determines whether they use MTD for ITSA.


However, if they receive £9,000 from property rental and £2,000 from bank interest then they will not be required to use MTD for ITSA. The bank interest will be report to HMRC on a finalisation statement.


MTD for ITSA only applies to individuals with income from self-employment or property businesses that are subject to Income Tax. If individuals are required to complete a Self-Assessment tax return for reasons, i.e. outside of property income and self employment, then they will continue to do so in line with the current process. They will only need to complete a Self-Assessment Tax Return if the information that they need to submit is not supported under Making Tax Digital.


What if rental income or business income increases?


Taxpayers are mandated into MTD for ITSA from the beginning of the tax year after they submit a Self Assessment Tax Return that shows they have income from property and/ or self-employment exceeding £10,000. This gives them up to 12 months to prepare and comply with MTD for ITSA.


If Eve recorded gross property income of £11,000 on her Tax Return for 2023-24 then she will submit her Tax Return before 31 January 2025. Eve will then have to comply with MTD for ITSA from 6 April 2025, i.e. after filing her 2023-24 Tax Return. Her first MTD for ITSA filing date will be between 6 July and 5 August 2025.


Differences between MTD and Self Assessment


Digital records must be kept. This does away with paper based cash books, ledgers etc.


Business owners and landlords will no longer file an annual Self-Assessment tax return.


The number of submissions will depend on the number of businesses and any property income they have. For each business and for all their properties, they will submit four quarterly updates and an End of Period Statement for each business/property portfolio. They will then submit a Final Return with any other income, gains or reliefs.


Each quarterly update does not need to include a confirmatory statement that the information is complete and accurate, like a Tax Return, as no tax is payable based on quarterly submissions.


Each transaction must digitally record the following:

  • the date of the transaction

  • for expenses - the category out of the specified list of expenses

  • for income - the trade or property business the income relates to

  • the amount


Retail businesses will be able to elect to record daily gross takings rather than every single transaction, but only if it would be unreasonable for the business to keep digital records of every sales transaction.


What exactly will be submitted?


The quarterly MTD for ITSA submission will consist of total business income in the quarter and totals expenses in defined categories. It is expected that those categories will be aligned with expense types currently required for the self-employment and property sections of the Tax Return. Quarterly Balance Sheets will not be required.


Any year-end adjustments, for say capital allowances, losses, disallowable expenses and any transactions that have been missed, double-counted or incorrectly entered on earlier quarterly submissions, will be made on a final submission for the year, known as the End Of Period Statement (EOPS).


HMRC have stated that corrections to a quarterly update can be made when submitting a subsequent quarterly update or End of Period Statement, whichever is due first.


HMRC will provide a calculation of the estimated tax liability based on the quarterly submissions. However, these quarterly estimates of tax do not result in any actual payment of tax.


How will the tax position be finalised?


Just like the current Self Assessment Tax Return, the finalisation statement will have to be submitted by 31 January following the end of the tax year.


It is only after the submission of the finalisation statement that any tax liability for the year will be calculated and finalised.


The final declaration is a kin to the current Self Assessment Tax Return (SA100). However, most of the Tax Return information current included on the Tax Return, e.g. self-employment and property income profits, will already have been submitted through MTD submissions or through the PAYE system for employment related income and benefits.


Dividend income, savings interest etc for a tax year, which is not submitted through a quarterly submission will be included in the finalisation statement.


MTD for ITSA - Digital start date


Unincorporated (non-limited companies) businesses will need to sign up to MTD for ITSA in advance of their digital start date. The digital start date is the date from which a business must keep digital records and make quarterly submissions.


For property businesses the digital start date is 6 April 2023.


For self-employments and partnerships, the digital start date is from the ‘beginning of the accounting period that starts on or after 6 April 2023.’


Therefore, if an accounting period starts on 1 April 2023, a business would expect to be mandated into MTD from 1 April 2024, being the first accounting period that starts on or after 6 April 2023.


Similarly, if an accounting period starts on 6 April 2023, a business would expect to be mandated into MTD from 1 April 2023, being the first accounting period that starts on or after 6 April 2023.


All taxpayers within MTD for ITSA will have to submit quarterly updates for the same quarters to 5 July, 5 October, 5 January and 5 April with reporting deadline exactly one month later.

The announcement of the abolition of basis periods, determining which accounting years are taxed in which tax years, from 6 April 2023 has created further confusion around when exactly unincorporated businesses, e.g. sole traders and partnerships, would be mandated into MTD for ITSA, and therefore when they will have to start filing quarterly submissions using MTD compatible software.


The draft regulations will treat an accounting period that ends on any of 31 March, 1, 2, 3 or 4 April, as if it ended on 5 April, with effect from 2023-24.


However, it now appears that by changing to a tax year basis from 2023-24, all self-employed taxpayers will have to start reporting under MTD for Income Tax from 6 April 2023, which is an acceleration of up to 12 months for the mandatory use of MTD for many unincorporated businesses that use 31 March as their year end.


Example


Bob is a newly self-employed businessman and has traded for nearly one year. He intends to prepare his annual accounts to 31 March each year. On his accountant’s advice, Bob was advised to prepare his annual accounts to 5 April. As 31 March and 5 April are considered the same date by HMRC his profits would still be taxed in the same accounting/tax year.


However, as the year ending 5 April 2024 starts on or after 6 April 2023, he expected to be mandated into MTD for ITSA from 1 April 2024, i.e. giving Bob an extra year to prepare for MTD for ITSA quarterly filing compared to a similar person with a year end of 5 April 2023 and 5 April 2024.


Under recently announced tax year basis rules, a system to help simply Self Assessment, Bob will now have to report his business income and expenses from 6 April 2023, as the period 1 April 2023 to 31 March 2024 is deemed to be the same as 6 April 2023 to 5 April 2024 for tax purposes. This now unexpected brings forward his start date for MTD for ITSA by nearly 12 months.


This combination of basis period and deeming provision means that unincorporated businesses may need to enter the MTD for ITSA regime from the next accounting period starting on or after 1 April 2023.


Updates, End of Period Statements and Year-end Finalisation Statements


Quarterly updates


HMRC defines these as: “An electronic submission of summary totals for specified categories from the digital records of each business on a quarterly basis from the software to HMRC.”


Quarterly updates are due one month after the end of the quarter. The quarterly filing deadlines for all unincorporated businesses filing under MTD for ITSA will be: 5 February, 5 May 5 August and 5 November. The first mandated MTD submission for the first quarter to 5 July 2023 must be submitted by 5 August 2023.


A taxpayer may elect to report their quarterly updates for calendar quarters i.e. to 30 June, 30 September, 31 December, and 31 March. However, the reporting deadlines will still remain the same as 5 August, 5 November, 5 February and 5 May.


HMRC will provide an estimate of the tax due to date based on the running quarterly submissions.


Amendments can be made to previously submitted quarterly updates when sending updates for a later period.


A quarterly update does not include a statement that the information is complete and accurate, unlike a Tax Return.


End of period statements


The End of Period Statement (EOPS) is not going to be linked in any way to the quarterly updates. You would expect that the sum of the four quarterly updates should equal the annual EOPS. However, the EOPS it will be made up of the same accounting amounts that are currently used on the pages of the Self Employment (SA103) and the Let Property (SA105) sections of the Self Assessment Tax Return


Furthermore, the requirement to submit an EOPS is also not linked in any way to the requirement to submit quarterly updates. Depending on the digital start date for each taxpayer, i.e. when MTD comes into effect, it is possible to submit four quarterly updates for the tax year 2023-24, with no requirement to submit an EOPS for the same 2023-24 tax year, but instead to prepare a normal Self Assessment Tax Return for the same 2023-24 tax year.


For the first few years, until an EOPS is required, which is linked to the digital start date for each taxpayer, the summary income and expense amounts will be reported on a Self Assessment Tax Return rather than an EOPS.


In other words, the submission of the quarterly updates will not be used to calculate the actual tax payable for the tax year, only a 'helpful' in-year estimate, and will not provide any of the information required for the calculation of the tax due, as a Self Assessment Tax Return maybe be required as normal in the first year or so of the new MTD system. It would only be in the next tax year, 2024-25, that the EOPS would be used to calculate the actual tax due.


An EOPS will:-

  • be required for each business and/or combined group of rental properties.

  • process and pull together the already submitted quarterly updates and make adjustments, which cannot be made through quarterly updates, for tax allowances, elections and any business expenditure not allowable for tax purposes.

  • relate to each business accounting year.

  • be the final submission, for each business and/or combined group of rental properties, to finalise the taxable profit or allowable loss.

  • be prepared and submitted after the accounting period has ended and up to 31 January following the end of the previous 5 April tax year end.

  • include a declaration that the information is complete and accurate.


Year-end Finalisation Statement


This is the process that brings together all the tax information that is needed to finalise the annual tax position and calculate the final tax liability for each individual


The year-end Finalisation Statement must be submitted by 31 January following the end of the tax year on the previous 5 April, just like the current Self Assessment Tax Return,


HMRC will provide an interface to allow the filing of the submission without the need for special MTD software.


If a taxpayer has other (non-self employment or property income) income or claims, e.g. bank interest, dividends, pension contributions or expenses, these will be reported through the new year-end finalisation statement, which will replacement the year-end Self Assessment Tax Return.


If any of the tax information needed for the final declaration is not supported through software submission then the individual would need to complete a Self Assessment Tax Return instead. This would be how the ‘digitally excluded’ would deal with their annual Tax Return and tax affairs.


MTD software and record keeping requirements


To comply with Making Tax Digital, accounts software must be used and it must have certain functionality defined by HMRC.


MTD enabled software is a software program or set of compatible software programs that can:

  • Record and preserve electronic records in an electronic form.

  • Provide to HMRC information and returns from the electronic records in an electronic form and by using the Application Programme Interface (API) platform.

  • Receive information from HMRC.


If more than one application is being used, data that flows between those applications must also be exchanged digitally.


HMRC have stated that it will not be offering its own software for Making Tax Digital. However, HMRC says that free (non-HMRC) software will be made available for individuals with the simplest tax affairs.


The software must be used to record digital accounting transaction, keep those digital records, submit a quarterly update and submit an end of period statement.


Those familiar with the current MTD for VAT rules will be familiar with the requirement that all digital records must be digitally linked to any other set of accounting records.


A digital link is where data is transferred or exchanged electronically. This should not involve any manual intervention, such as copying and pasting or re-typing of accounting totals.


The expectation is that spreadsheets will be as acceptable for MTD for Income Tax as they are for MTD for VAT, assuming that the spreadsheets are MTD-enabled or used with additional ‘bridging software’. Bridging software is a tool that allows information from non-MTD enabled software to be reported digitally to HMRC.


Individuals and business will not automatically be moved-over to MTD for ITSA. They will need to sign up and enrol ahead of the first full accounting period that begins on or after 6 April 2023.


Exemptions


Some businesses are exempt from the MTD if they meet certain criteria.


Businesses with turnover/rents over £10,000 pa will not have to use the MTD system is they meet one of the criteria specified by HMRC:

  • The business is run entirely by practising members of a religious society whose beliefs are incompatible with the requirements of the regulations (for example, those religious beliefs prevent them from using computers).

  • It is not reasonably practicable for an individual to use digital tools to keep their business records or submit their returns, for reasons of age, disability, remoteness of location or for any other reason.


On application to HMRC, they will give a ruling if an individual meets any of the exemption criteria.


The HMRC guidance indicates that if the taxpayer can get any internet access at their home, business or to another location then they will not be exempt on the basis of digital exclusion.


The following taxpayers will have full exemption from MTD:

  • Partnerships containing a corporate partner

  • Other types of partnership, including Limited Liability Partnerships (LLPs)

  • Trusts (including trusts with property income)

  • Estates of deceased persons

  • Trustees of registered pension schemes

  • Non-resident companies


Non-resident landlords whose gross income from UK property exceeds £10,000 pa will have to apply with MTD for ITSA rules.


UK resident landlords with foreign property income that exceeds £10,000 pa will have to apply with MTD for ITSA rules.


Other taxes and MTD


Currently, limited companies and Corporation Tax are not within scope for MTD. It is expected that MTD for Corporation Tax will start from April 2026 at the very earliest.


VAT and Income Tax Self Assessment are totally different taxes. Therefore, the quarter end dates for Income Tax and VAT reporting may be also be different to each other.

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