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  • Mr Paul Clifton

Making Tax Digital for Income Tax Self Assessment (ITSA)

Updated: May 10



Delay to MTD for ITSA announced


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


In a Written Ministerial Statement, Lucy Frazer, the Financial Secretary to the Treasury, issued 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. MTD for ITSA 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 in the form of 'The Income Tax (Digital Requirements) Regulations 2021'.


Reforms to basis periods, which allocate accounting periods to tax years, will now not take place until April 2024 . 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 property landlords, who are in business on 5 April 2023, will have to follow MTD regulations from 6 April 2024, by filing quarterly income and expenses 'update' statements under MTD, if their combined gross turnover/rental income exceeds £10,000 pa. Sole traders and individual property landlords who start up after that date will move into MTD from the start of their third tax year.


A similar position arises in the future where the gross combined income of sole-traders and individual property landlords exceeds £10,000 in a tax year. The year in which they exceeds 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.


The original article below, has now been updated, for the new dates i.e. from 2023-24 to 2024-25 and from 6 April 2023 to 6 April 2024 etc.


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.


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 24 months before the start of MTD for ITSA, 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. 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 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, people will have to 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.


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 five requirements for MTD for ITSA

  • record business transactions in a digital manner

  • preserve those records for the defined period

  • make four quarterly update 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 must be submitted by, the normal self-assessment deadline of, 31 January following the end of tax year.


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 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 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 £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 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 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 trade 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 exceeds 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, 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 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.


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.


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.


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 final declaration will have to 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 middle man with special tools to link the two systems.


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 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.


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 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 be also be different to each other.

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