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  • Mr Paul Clifton

Making Tax Digital for Income Tax Self Assessment

Updated: Dec 22, 2022



MTD ITSA delayed by two more years


The Government issued a statement on Monday 19 December 2022 regarding Making Tax Digital for Income Tax Self-Assessment (MTD ITSA).


MTD ITSA was to be mandatory, from 6 April 2024, for all self-employed individuals and landlords who receive aggregate gross trading income and / or rental income over £10,000 pa.


The MTD ITSA launch is postponed from 6 April 2024, by two years, until 6 April 2026.


As well as MTD ITSA being delayed until April 2026, the turnover threshold is also being increased from £10,000 to £50,000. From 6 April 2027, the threshold will be reduced to £30,000, therefore bring more individual into the MTD ITSA system. Read more by clicking here.


Introduction to Making Tax Digital (MTD) - Original blog article below


One of the big announcements in the 2015 Budget, by the then Chancellor, George Osborne, was that Tax Returns were going to be abolished. What the announcement did not state was what would be implemented in its place.


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. It is forecast to affect limited companies from no earlier than 6 April 2026.


HMRC say that the scheme is part of the government’s wider ambition to fully digitalise the tax system and reduce the administrative burden of tax returns for small businesses. I think that it is fair to say that the majority of accountants and small businesses do not share this assertion.


HMRC are introducing some major changes in how taxpayers notify them of untaxed income. This will principally affect sole trader and partnership businesses and landlords.

From 6 April 2024, Making Tax Digital for Income Tax Self-Assessment will apply to self-employed individuals and non-corporate landlords who receive total business turnover and/or property income above £10,000 pa.


Individuals affected by the new rules will have to maintain digital records, submit quarterly updates to HMRC, providing summary information of their income and expenditure for each quarter. They will have to do this using MTD compatible software.


After the end of the tax year, on 5 April each year, and having filed quarterly updates, an End of Period Statement (EOPS) will also be required for each business and for any property income.


Finally, by 31 January after the end of the tax year they will also have to make a final digital submission, the Final Declaration, to legally declare that al their income, gains, allowances etc are correct. This is similar to the current annual Self-Assessment Tax Return declaration.


Many of the MTD ITSA software platforms are still in development and being tested. We are one of very few accountants who are already beta-testing HMRC approved software through the HMRC MTD for ITSA pilot.


We were an early tester and adopter of MTD for VAT software. We will be making recommendations of suitable systems and software for our owner managed business and individual landlord clients. Many of our smaller clients prefer to use Excel spreadsheets. We will therefore be focusing on providing 'bridging software' solutions to enable clients to continue maintaining simple records on Excel spreadsheets that can then be uploaded each quarter to HMRC.


Our view is that spreadsheets will most probably be the default choice for a lot of our smaller clients, particularly non-tech individuals, those that don’t want to learn new software, don't want to spend money on software with functionality they won’t want and need and numerous buy-to-let landlords with a property or two. We expect to work closely with clients to upload their spreadsheets, through our bridging software solution, to HMRC.


What’s coming?


MTD for ITSA starts on 6 April 2024. The changes are probably more significant than the introduction of Self-Assessment back in 1997. Please do not underestimate these changes.


Taxpayers currently prepare a single Self-Assessment Tax Return. However, in future they will have to file four Quarterly Updates and an End of Period Statements (EOPS) for each business / group of properties and a year-end Final Declaration.


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, individuals will move to quarterly submissions. These must be made electronically through software.


The accounting transaction data must feed directly from the day-to-day digital records through to HMRC via the four quarterly and year-end submission, without any physically or manual re-keying, re-typing, copy and pasting or any similar manual interaction. Different software packages that make up the parts of the whole accounting system must be digital linked.


MTD for ITSA software will need to be reauthorised with HMRC's systems every 18 months. This is similar to what is currently happening with MTD for VAT. The software will prompt taxpayers.


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.


Submitting tax return data and linking with HMRC


HMRC promised from the start that there would be free software available to allow the smallest of businesses, with straightforward affairs, to file under MTD. This appears to mean for sole-trader businesses that are not VAT registered and do not run a PAYE scheme.


HMRC have stated that in cases where a taxpayers' basic MTD for ITSA software does not support the submission of other non-MTD personal income e.g. bank interest, dividend and employment income, and self -employment and property income less than £10,000, capital gain etc, HMRC will continue to provide a service through which taxpayers can submit their other income. This includes making the Final Declaration). For non-MTD for ITSA taxpayers, the existing online Self-Assessment return service will continue.


Accountants will be able to continue to submit a client's Final Declaration, similar to the current consolidated single Self-Assessment Tax Return, using the new HMRC Update and Submit service. This should be similar in structure to how the current online HMRC Self-Assessment Tax Return service works. Of course, self-employment and property profits and losses, where income is over £10,000, should already auto populated. It is anticipated with time that other sources of income, e.g. employment income submitted through the RTI payroll system should also be auto populated for the taxpayers' final declaration confirmation.


What are the basic requirements for MTD for ITSA?


There are five key requirements for MTD for ITSA

  • record business transactions in a digital manner

  • preserve those records for the defined period

  • make four quarterly updates to HMRC

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

  • make a final declaration for all taxable income for the tax year.

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


The EOPS, for each business, must be submitted in accordance with the normal self-assessment deadline of, 31 January following the end of tax year.


A final declaration, pulling together the quarterly submissions and EOPS, must be submitted no later than 31 January following the end of the tax year. This will finalise the tax year and provide any other taxable (non-property and self-employment) income, gains and reliefs.


Who will be affected by MTD for Income Tax in April 2024?


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 affected businesses will need to follow the rules for MTD for ITSA from their first accounting period that starts on or after 6 April 2024.


The following types of income are not included as part of the £10,000 threshold:

  • Employment income

  • Dividends

  • Savings income

  • Partnership income (until April 2025).


When to sign up


Those who are required to sign up to MTD for ITSA, will firstly need to submit their Self-Assessment Tax Return for 2022/23 by 31 January 2024. HMRC will then review that Tax Return and assess whether the taxpayer’s relevant income is more than £10,000. HMRC will then write to the taxpayer and tell them that they need to sign up and will need to use compatible software.


Business types


There are five categories of quarterly update. This depends on the types of income received by the individual taxpayer. They are as follows:

  • Businesses with trade profits (self-employed / partnership)

  • Businesses with property income (not UK or EEA FHL)

  • Overseas property (not EEA FHL)

  • FHL in the UK

  • FHL in the EEA

FHL is Furnished Holiday Lettings


Turnover less than £85,000 (the VAT threshold) and over £10,000


Whilst reporting under Making Tax Digital for income tax is completely separate to MTD for VAT, the VAT registration threshold will be relevant if individuals choose to submit reduced expenditure reports each quarter.


Individuals with turnover under the VAT threshold, of £85,000 pa, may choose to provide a total of all income and a total of all expenses, each quarter to H M Revenue & Customs. This is often referred to as ‘three-line accounts’ i.e. income, costs and profit/loss. This is in contrast to those with turnover over £85,000 who must provide a total for income and totals of expenditure that fall within several predefined categories under the quarterly update requirements.


Giving individuals the option to submit consolidated expenses under MTD for income tax makes sense. They already have this option under the current Self-Assessment system already when filing their Tax Returns.


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.


Determining the £10,000 turnover threshold


HMRC will review if aggregate turnover exceeds £10,000 in a tax year by checking the details included on the taxpayer’s last submitted tax return. HMRC will review:

  • Self-employment turnover (in box 15 of SA103F or box 9 on SA103S)

  • Self-employment other income (in box 16 of SA103F or box 10 on SA103S)

  • UK property income (in box 20 of SA105)

  • Other UK property income for grant of lease (in box 22 of SA105)

  • Other UK property income for FHL (in box 5 of SA105)

  • Foreign property gross income etc

If the sum of the aggregate turnover/income from the above boxes exceeds £10,000 then the taxpayer will be mandated into MTD ITSA from the beginning of the next tax year.


Once existing taxpayers have prepared and submitted their Tax Return for 2022/23, and who are self-employed and/or have aggregate business / property turnover exceeding £10,0000 on that Tax Return, they will be able to ascertain if they must comply with MTD ITSA from 6 April 2024.


If no turnover or other business / property income is reported on the Tax Return e.g. because it is covered by say the property income allowance, trading income allowance, rent-a-room relief etc then such income will not be used to determine if the £10,000 MTD turnover threshold has been exceeded.


Where a business or letting of property commences part way through a tax year, the turnover / property income amounts will be annualised to determine if the £10,000 turnover threshold has been exceeded. It will therefore become more important to carefully record the start date of a self-employment or property letting.


Notices issued by HMRC if £10,000 threshold exceeded


The taxpayer will not have to make the decision to join MTD for ITSA alone. This is not like MTD for VAT, where the VAT registered business must carefully review its annual turnover over the year to see if it has exceeded the £85,000 threshold.


Based on submitted Tax Returns, if the £10,000 aggregate turnover threshold has been exceeded, HMRC will issue a formal notice to the taxpayer to start submitting quarterly updates under MTD ITSA.


For the first year of MTD ITSA (i.e. for 2024/25), any notice will be issued between 1 February 2024 and 5 April 2024. This only gives the taxpayer up to two months' notice, though a taxpayer can determine their position for themselves by reviewing their own Tax Return income totals. It may therefore be sensible to get Tax Returns for 2022-23 filed as early as possible and not leave it until the 31 January 2024 deadline, which over the last two years has been extended to 28 February, leaving only a maximum of one month to receive the formal notice to comply with MTD for ITSA.


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


The threshold relates to the sum across all businesses 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 receives £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 final declaration.


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.


A new property landlord, or self-employed trader, will submit their trading figures on a Self-Assessment Tax Return for at least two successive tax years before they are mandated into MTD ITSA.


If Eve recorded gross property income of £11,000 on her Tax Return for 2024-25 then she must submit her Tax Return before 31 January 2026. Eve will then have to comply with MTD for ITSA from 6 April 2026, i.e. after filing her 2024-25 Tax Return. Her first MTD for ITSA filing date will be between 6 July and 5 August 2026.


Sole traders and individual property landlords who start up after 5 April 2024 will move into MTD from the start of their third tax year if their gross combined income as a sole-trader and/or property landlords exceeds £10,000 in a tax year. The year in which they exceed the £10,000 income threshold will be their 'first year'. In the second tax year they complete their Tax Return for the first year. In their third year they are mandated into the MTD system.


HMRC is working on a new online service to replace the Self-Assessment Tax Return. This will be used to report all income and claims which are not included within MTD ITSA, such as trading income below £10,000, bank interest and dividend income, capital gain and other reliefs. Employment income and self-employment / rental profits over £10,000 from MTD will be pulled into the new ITSA 'Tax Return' system for taxpayers to approve once a year.


What if rental income or business income reduces?


If an individual’s gross turnover/rental income falls below the £10,000 threshold they can opt-out of the MTD for ITSA requirements.


If their gross income fluctuates around the £10,000 level, and to avoid opting-out and then re-joining regularly, they can only out-out of MTD for ITSA after three consecutive years of their gross income falling below the £10,000 threshold. Individuals can also stop if their business permanently ceases.


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 make a final submission 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.


Example


Joe runs two sole trader businesses: the Cake Shop and Sparkes Electricians. He also has two buy-to-let properties.


Every quarter, by the same due date, Joe will need to make three separate quarterly updates, for the Cake Shop, Sparkes Electricians and the group of properties.


After the end of the tax year, Joe will also need to make three End Of Period Statements for the two businesses and for his properties, in order to finalise each of the three 'businesses'.


Finally, Joe will have to make a Final Declaration for all this taxable income. This will confirm the completeness of all three 'businesses' and also provide any other taxable income e.g. employment income, bank interest, dividends and claim any other allowances.


Joe will therefore make 12 quarterly update submissions (4 pq x 3 business), three EOPS and one final declaration i.e. a total of 16 submissions. This compares to the single Self-Assessment Tax Return that is currently required.


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 total expenses analysed into up to 15 defined categories. The categories will be the same as currently required on the self-employment and property sections of a Tax Return. Quarterly Balance Sheets will not be required.


Any year-end adjustments, stock, debtors, creditors and capital allowances, losses, disallowable expenses and 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, a final declaration will be submitted by 31 January following the end of the tax year.


It is only after the submission of the final declaration 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 final declaration.


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 2024 (*).


For self-employments and partnerships, the digital start date is from the ‘beginning of the accounting period that starts on or after 6 April 2024.’ (*)


(*) The 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. Therefore, it will be any period that starts on or after 1 April 2024.


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

Updates, End of Period Statements and Year-end Final Declarations


Quarterly updates


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. Calendar months can instead be used i.e. 30 June, 30 September, 31 December and 31 March, though the quarterly update filing dates remain the same.


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 as follows:

Period covered

Filing deadline

Quarterly update 1

6 April to 5 July

5 August

Quarterly update 2

6 July to 5 October

5 November

Quarterly update 3

6 October to 5 January

5 February

Quarterly update 4

6 January to 5 April

5 May

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. However, the reporting deadlines will still remain the same and will therefore as follows:

Period covered

Filing deadline

Quarterly update 1

1 April to 30 June

5 August

Quarterly update 2

1 July to 30 September

5 November

Quarterly update 3

1 October to 31 December

5 February

Quarterly update 4

1 January to 31 March

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.


The EOPS will perform a similar function to the self-employment pages of the current Tax Return. It will therefore take the accounting profits, from each set of self-employment Annual Accounts, and make any necessary accounting adjustments to finalise the tax position of each trade or business.


Final Declaration


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. Unlike the EOPS, only a single Final Declaration will be required for each individual.


The year-end Final Declaration must be submitted by 31 January following the end of the previous tax year to 5 April, just like the current Self-Assessment Tax Return.


HMRC will provide an interface to allow the filing of the Final Declaration 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 Final Declaration, 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 compliant software is expected to fall into one of three different types:

  1. Software that can be used to keep digital records and file returns via HMRC’s API.

  2. API enabled spreadsheets, with an inbuilt function, allowing filing of returns via HMRC’s API.

  3. Bridging software that can take spreadsheet digital records and submit this via HMRC API.

An API is an Application Programming Interface. This will allow accounting data to be submitted from the business's accounting records to HMRC's tax systems through an electronic software interface, like a middleman with special tools to link the two systems.


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

  • Create digital records of each business transaction.

  • Store the digital records.

  • Send quarterly electronic updates to HMRC by using an Application Programme Interface (API) of the totals of business income and expenses from digital records.

  • Send and confirm the End of Period Statements (EOPS) for each business.

  • 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 data or totals.


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.


HMRC have confirmed that it is perfectly acceptable to use one software provider's product for submitting the quarterly updates and separate software, e.g. their accountant's software to pull together and make the final declaration for of all sources of taxable income and gains and make any relevant claims for allowances and expenses.


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.


Penalties


HMRC can impose penalties for not complying with Making Tax Digital for VAT if a business fails to meet their obligations under MTD.


These are follows:

  • Up to £400 for every return filed without using compatible software

  • £5-15 for every day that records are not kept digitally within the compatible software

  • £5-15 for every day that you do not use digital links to transfer data between pieces of software.

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 if 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 also be different to each other.

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