Making Tax Digital (MTD) for Income Tax & Self-Assessment (ITSA)

Making Tax Digital (MTD) represents a major change in the way taxpayers interact with HMRC. It is part of HMRC’s flagship programme to make the UK one of the most digitally advanced tax collection agencies in the world, and change is already well underway.

MTD for VAT was introduced from 1 April 2019; it means that if your business turnover exceeds the VAT threshold (currently £85,000) you are mandated to file digital VAT returns.

How will MTD affect smaller businesses?

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 for sole trader businesses and landlords with total business or property income (not profit) above £10,000 per year. This can come from combined self-employed and rental income (e.g. £8,000 a year from rent and £4,000 a year from running a part-time self-employed business).

It means that you’ll need to use software to keep digital records and make regular tax submissions to HMRC. Instead of sending a Self-Assessment tax return to HMRC once a year, you’ll be required to use compatible software 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 do not fall within the MTD ITSA criteria you will continue to submit your tax returns under the current system.

What you have to submit

MTD ITSA requires more administration than the previous system so scrupulous record-keeping will be essential moving forwards.

You will be required to submit quarterly reports and an end of period statement 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.

You can read HMRC’s full MTD guidance HERE.

Finally, we have set up a separate email address to deal with any Making Tax Digital queries you may have – mtd@ttca.co.uk.  

This is a big change so please bear in mind, that we are only able to let you know details as and when HMRC confirm them, therefore there may be some questions that we are unable to answer at this time.  Please use this email instead of ringing the office, as it will go directly to the MTD team.

Making Tax Digital Frequently Asked Questions

We strongly recommend that you read our frequently asked questions for further information:

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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. 

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.

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.

An accounting expert from Treetops can call you back at a time that suits you.

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