Making Tax Digital Accountants
Treetops Specialist Making Tax Digital Accountants
Making Tax Digital (MTD) represents a major change in the way taxpayers interact with HMRC. The scheme is already in place for VAT and will come into effect for income tax in April 2026.
Making Tax Digital (MTD) – what is the latest?
On 19 December 2022, the government announced that self-employed individuals and landlords will have more time to prepare for Making Tax Digital (MTD) for Income Tax Self-Assessment (ITSA).
The government has also changed the criteria, and from April 2026, self-employed individuals and landlords with an income of more than £50,000 will be required to keep digital records and provide quarterly updates on their income and expenditure to HMRC through MTD-compatible software. Those with an income of between £30,000 and £50,000 will need to do this from April 2027. Most customers will be able to join voluntarily beforehand, meaning they can eliminate common errors and save time managing their tax affairs.
The government has also announced a review into the needs of smaller businesses, particularly those under the £30,000 income threshold. The review will consider how MTD for ITSA can be shaped to meet the needs of these smaller businesses and the best way for them to fulfil their Income Tax obligations.
MTD for ITSA will not be extended to general partnerships in 2025, as previously announced.
We will update our website at a later date with the latest guidance. If you wish to keep up to date with the latest information, please refer to HMRC’s website.
MTD for VAT
MTD for VAT-registered businesses was introduced on 1 April 2019; it means that if your business turnover exceeds the VAT threshold (currently £85,000), you are required to follow MTD rules and file digital VAT returns.
From April 2022, all existing voluntarily registered businesses (those with turnover under £85,000) and all newly VAT registered businesses from 1 April 2022 will need to submit their VAT returns under the MTD programme.
MTD for income tax
The next stage of HMRC’s digital transformation is MTD for Income Tax and Self-Assessment (ITSA) and is due to come into force from 6 April 2024.
Sole traders and landlords with total business or property income (not profit) above £10,000 per year, will be required to follow the Making Tax Digital rules from this date and file digital income tax self assessment returns.
MTD for Corporation Tax
Following a consultation, the government have invited companies to take part in a pilot for MTD for Corporation Tax from 2024, and it will not be mandated until at least 2026.
What does Making Tax Digital (MTD) mean for small businesses?
If you are a sole trader and/or landlord whose annual income exceeds £10,000, Making Tax Digital will affect how you keep financial records and file you income tax return.
If you have more than one business, it is your combined income from these businesses that must be taken into account.
For example, if you earn £8,000 a year from rent and £4,000 a year from running a part-time self-employed business, you exceed the £10,000 threshold and must comply with MTD.
From April 2024, you will be required to use MTD compatible software to keep digital records of all of your financial transactions. You must also make regular tax submissions to HMRC, instead of sending a Self-Assessment tax return once a year.
Using compatible software you will have to submit:
- Four quarterly updates to HMRC detailing income and expenses.
- An End of Period Statement (EOPS).
- A Final Declaration at the end of the tax year.
If you use the Income Tax Self Assessment (ITSA) system but earn less than £10,00 per year, you will continue to complete your tax returns under the current system.
Making Tax Digital for sole traders and landlords
Making Tax Digital for ITSA requires more administration than the previous system so scrupulous record-keeping will be essential moving forwards. Cloud accounting software makes this task far easier, and Treetops can help you to make the transition if you haven’t already.
You will be required to submit quarterly reports and an end of period statement (EOPS) to HMRC for every separate business (source of income) that you have.
For example, if you are a sole trader and a landlord, you will need to make 2 submissions each time, even if each source is under £10,000 but together they exceed £10,000, so MTD rules apply.
VAT registered sole traders and landlords
If you are a sole trader or landlord registered to VAT, you should already be submitting your VAT returns with MTD compliant software, so the transition to MTD for income tax should be much easier.
Making Tax Digital for limited companies
VAT registered businesses are already required to comply with Making Tax Digital for VAT. The current VAT threshold is £85,000 a year, but some businesses with income under that amount may also choose to register for VAT to benefit from a flat rate.
As a limited company, you are required to file an annual Corporation Tax return to HMRC. At present, MTD for Corporation Tax is not planned to come into effect until at least 2026. The government ran a consultation in late 2021, and are launching a trial in 2024.
If you are already submitting your VAT return with MTD compatible software, then it makes sense to start doing the same for Corporation Tax as soon as the opportunity becomes available. If you are a newly formed limited company and require advice on your tax obligations, you can contact Treetops for advice.
Making Tax Digital timeline
- April 2019 – MTD for VAT came into effect, affecting only VAT registered businesses
- From 2024 – a pilot scheme for MTD for Corporation Tax will launch
- From April 2024 – MTD for self assessment income tax will become mandatory for sole traders and landlords with an income exceeding £10,000 per year
- From 2026 (at the earliest) – MTD for Corporation Tax will come into effect for limited companies
You can read HMRC’s full Making Tax Digital guidance HERE.
Contact Treetops Chartered Accountants for help with Making Tax Digital
At Treetops, we are dedicated to keeping our clients and the small business community updated with the latest information on Making Tax Digital.
We will update this page with further developments and we have set up a separate email address to deal with any Making Tax Digital queries you may have – email@example.com. Please use this email instead of ringing the office, as it will go directly to the MTD team.
This is a big change so please bear in mind, that we are only able to pass on details as and when HMRC confirm them, therefore, there may be some questions that we are unable to answer at this time.
If you require support with bookkeeping, VAT, tax, expenses or cloud accounting software, then please make an enquiry and we will be in touch as soon as possible.
Making Tax Digital Frequently Asked Questions
We strongly recommend that you read our frequently asked questions for further information:
What if I currently maintain paper records?
You’ll have to start using digital record-keeping and reporting software from April 2024, unless you have a justifiable reason to be exempt. Your personal preference for offline bookkeeping won’t enable you to ignore MTD requirements. Failure to comply may result in penalties.
You may wish to start using software from next tax year (April 2023) so you can familiarise yourself with it before you are required to legally use software.
How does the £10,000 threshold work for MTD ISTA?
Taxpayers with a combined income from a self-employed business and rental properties of £10,000 or less are not required to join MTD ITSA. The income threshold looks at:
- Turnover/gross income (not profits)
- Turnover from self-employment and property only, added together
- Each taxpayer individually (so where there is income from jointly held property the individual’s share of that gross income per the tax return is what counts).
Income not reported on the tax return is not included for the purposes of the £10,000 turnover threshold. Examples of this include income not reported because it is wholly covered by:
- the trading allowance;
- the property allowance; or qualifying care relief.
What information is required on the quarterly submissions?
For each business, you will be required to submit a summary of the income and expenses for the following quarters:
- The first quarter covering 6 April to 5 July will have a filing deadline of 5 August.
- The second quarter covering 6 July to 5 October will have a filing deadline of 5 November.
- The third quarter covering 6 October to 5 January will have a filing deadline of 5 February.
- The final quarter covering 6 January to 5 April will have a filing deadline of 5 May.
All businesses will have to report for these quarters regardless of their accounting period end.
You can make a “calendar quarter election” which will slightly change the period end dates to 30 June, 30 September, 31 December and 31 March. The filing deadline with this election in place remains unchanged.
You do not need to provide any narrative, balance sheet figures, or make any tax or accounting adjustments for these submissions.
What information is required on the End of Period Statement (EOPS)?
An EOPS will include the usual accounting and tax adjustments required to finalise the tax position for each trade or property business. This will be due by the normal self-assessment deadline of 31 January.
This is not enough to finalise your tax affairs as it only covers one element of your income.
What information is required on the Final Declaration?
A final declaration will crystallise your tax position for the year. Only at this stage do you provide details of all other factors which will determine your tax liability for the tax year.
Unlike the quarterly submissions and the EOPS, there is one Final Declaration per taxpayer, not per business and this replaces the usual self-assessment tax return.
Does MTD ITSA apply to partnerships?
MTD ITSA will start for general partnerships (not LLPs, not partnerships with a corporate partner, and not partnerships with more than 20 partners) from 6 April 2025 – one year later than for individuals. The MTD ITSA obligations will apply to the partnership rather than individual partners. Until MTD ITSA is extended to partnerships, partners must continue to report partnership income annually along with income from other non-MTD sources.
What if my sole trader business year end is not 05 April or 31 March?
As of the 2024/25 tax year, all affected businesses have to use the tax year as their basis period. They will only be liable for profits arising in that and subsequent tax years. Overlap profits or adjustments will no longer exist.
Most sole traders already use the tax year as both their accounting and basis period, of course, so these changes will not affect them. But those that have different accounting periods—such as 1 January to 31 December—will have to use 2023/24 as a transition period and HMRC will be offering transitional relief to those with higher tax liabilities, as a result.
We will discuss this with you when preparing your 2022/23 and 2023/24 tax return.
How will MTD ITSA work where there are multiple sources of income from property and self-employment?
Separate obligations to comply apply to:
- Each separate trade
- UK property income portfolio (not individual property)
- Overseas property income
There can be only one set of submissions (quarterly updates and EOPS) for each obligation. If records relating to one obligation are held in more than one software product, they will need to be combined in one product before the submission is made to HMRC. This may be a problem where records for different divisions of the same trade or records for different properties are held in different systems.
How will MTD ITSA work for jointly held properties?
Each individual is required to comply with MTD ITSA requirements for their income from property. This includes their share of income from any jointly held properties. There is no form of joint reporting by property or portfolio of properties. This will create very significant practical problems for taxpayers who have different property holdings with different groups of joint owners. In some cases, the accounting may be done by different people and using different software products and the taxpayer may have great difficulty obtaining the information in time to submit the quarterly update and in complying with the requirement to have digital links from the transaction records through to submission. The accounting profession has raised this as a major area of concern with HMRC, so watch this space.
I have rent a room income; will I have to report under MTD?
If you have rent a room receipts below the £7,500 threshold, or trading or property income below £1,000 where the trading / property allowance is claimed, it will not count towards the threshold (provided they are not included on the Self-Assessment).
However, if you are mandated into MTD ITSA anyway (for example because you have other income which takes you above the threshold) you will be required to account for all of your property or trading income under MTD. This means that, for example, if you had a trading turnover of £15,000 and rent a room receipts of £5,000 you will have met the MTD requirements for both your trade your property income and you will have to report your rent a room income under MTD.
I am already registered for MTD VAT, will those submissions be sufficient for MTD for ITSA?
No, HMRC will require you to still make MTD VAT submissions outside of the MTD ITSA obligations. It may be worth thinking about aligning your VAT quarters to the MTD ITSA quarters to alleviate the administrative burden of quarterly report to different dates. Each has a separate legal obligation, and so also both will attract penalties.
Do I need to purchase software? If so, which is the best for me?
HMRC has suggested that software is optimal for MTD ITSA, as there is less room for error and data deletion, and it may prove difficult to submit the required EOPS or the final declaration without appropriate software to support you.
The aim of MTD ITSA is to streamline the income tax system, and make it easier and faster to get your tax right. Keeping your business records digitally also makes it easier for you to share information with us, which will save time during the accounts preparation process.
We do have a wide range of software partners that we trust, however there is no one size fits all. Over the next few months, we will be looking at providing a number of recommendations, to help you make your decision.
Will Treetops offer support and training for these softwares?
We will provide some guidance and possibly training videos for our recommended softwares. Again, we will be looking into this over the next few months.
Can MTD ITSA quarterly updates be amended?
Quarterly updates can be amended by resubmitting them. If there are open quarterly updates, the deadline for amendments is the date the next quarterly update is due. If all the quarterly updates have been submitted, the deadline for amendments to the submitted figures is the same as the due date for the EOPS.
It is not yet clear which adjustments need to be made by resubmitting a revised quarterly update and which adjustments can be made as part of the annual adjustments process prior to completing the EOPS.
Are there any exemptions from MTD ITSA?
It is possible to apply to HMRC directly for an exemption if you can show that it’s not reasonable or practical for you to use computers or the internet. This may be because:
- of your age;
- of a disability;
- you are running your business from a remote geographical location;
- you object to using computers on religious grounds; or
- any other reason why it’s not reasonable or practical.
Each application is considered on a case-by-case basis.
Businesses that are already exempt from engaging with HMRC through other mandatory digital channels will be exempted from the MTD requirements.
I am not UK resident or domiciled, do I still need to comply?
If you are domiciled or resident outside of the UK, you are not exempt from MTD ITSA, but you only need to comply with MTD ITSA rules for your UK based property and/or self-employment income. Which means that you do not have to report any of your income from outside of the UK.
Are there any penalties for missing the MTD for ITSA deadlines?
Despite best efforts, late submissions do happen, especially when you are expected to report your income more frequently. So HMRC has announced a slightly more lenient, points based penalty system for late submission of MTD ITSA reporting instead of the current HMRC flat rate automatic penalty regime. This way it aims to penalise those who repeatedly fail to comply with HMRC’s requirements rather than the one-off late submission.
HMRC has also indicated that there will not be penalties charged for inaccuracies on the quarterly submissions, as it is likely there are going to be adjustments made to these figures in the EOPS.
Can you leave MTD ITSA if your turnover/gross income drops below £10,000?
A taxpayer who is in MTD ITSA and whose turnover/gross income falls below £10,000 for three successive tax years can claim exemption from the start of the following tax year.
How do I sign up for MTD ITSA, or is it an automatic process?
HMRC will review your self-assessment tax return for 2022/23 and tell you if you must sign up for MTD ITSA. Between now and 6 April 2024, our team at Treetops will also be notifying you if we believe you will fall into the criteria of MTD ITSA.
HMRC is currently running a pilot for MTD ITSA, so if you’d like to get started now, please let us know.
As an agent and my accountant, can you do the submissions for me?
We will of course be able to make all of these submissions for you.
However, as the quarterly submissions are only a basic summary of your income and expenses, and is not expected to be absolutely accurate, over time you may prefer to make these submissions yourself to minimise our time doing your books and ultimately our fees charged.
For all our clients that fall within MTD ITSA, we will of course review your income and expenses, make the appropriate accounting and tax adjustments to submit the End of Period Statements and the Final Declaration, and we will be able to do that through our agent software.
Once we have further guidance from HMRC, we will put together a package of the services we will offer and our anticipated fees.
Please call or email to arrange your FREE consultation for any of our services.