What is MTD?

MTD means Making Tax digital. Its part of HMRC’s plan to make it easier for both individuals and business to get there tax right and to keep on top of their finances by completing digital records and using approved software to file the required returns to HMRC. This will minimize clerical errors and improve accurate reporting.

Making Tax digital is happening in several stages, already we have seen the first two phases of Making Tax digital being implemented for VAT registered businesses. In April 2019 the starting phase began which saw some VAT registered business having to sign up and digitally send across their VAT returns. These were businesses that had a total turnover of over £85k.

The next stage was implement from April 2022 which saw all VAT registered businesses being mandated to sign up to making tax digital for VAT regardless of their turnover.

The future forecast is the first stage for Income tax will be in April 2024 and followed by the second stage that will include partnerships in April 2025. The plan is then to introduce Making tax digital for corporation tax in April 2026. This dates, as always, can and are likely to change.

 

What is MTD for ITSA specifically?

MTD for ITSA (Making tax digital for Income Tax Self-Assessment) is the next phase being released in April 2024. It is still in the planning phases with some people already enrolled under the pilot stages. But what we know so far is that this will replace the current Self-Assessment system, initially for sole traders and landlords that have a combined total turnover of over £10K. This will mean that an approximate 4.2million individuals of small business/sole traders will have to comply with the new rules. 

What is the new process?

The new process will mean that you will have to provide HMRC with information about your business on a more regular basis. Currently you only need to file a self-assessment annually, but under MTD for ITSA, you will have to submit a quarterly return to HMRC and an End of Period Summary (EPOS)  for each stream of income and then a final declaration which will be in essence like your current self-assessment. 

The quarterly reports will be an estimate of your income, costs and profit for the quarter if you have a turnover below £85k, and a more detailed breakdown if you have a turnover above this amount. The dates for this quarters have already been established along with the submission deadlines. Although you can submit more often than quarterly, the information for that quarter must be completed by the deadline

Quarter	Period	Deadline
1	April -June	5th August
2	July – September	5th November
3	October – December	5th February
4	January – March	5th May

The EOPS will then need to be completed with the actual amounts for the financial year along with any adjustments (capital allowances etc) can be made. This will then  contribute to your Final Declaration Assessment. HMRC has already warned that the figures that are reported in the quarterly returns must reflect your accounts. You will not be able to send blank quarterly returns.

Once the EOPS has been submitted, you will then need to complete a final declaration, which is similar to the current self-assessment. This will bring together all forms of income and calculate your tax liability for the year.  

Examples:
Jade is a full time mum and runs a yoga group one evening a week. She receives a total of £4800 in from her customers and spends £500 on rent and equipment per year. Her turnover is £4800 which is less than the required amount. Therefore Jade will not have to register for MTD for ITSA

Andrew is a CIS registered subcontractor. He receives a total of £15,000 from the contractor he works for. He will be required to register for MTD for ITSA as his turnover is over £10k

Dani has multiple income streams, she works part time as a hairdresser which has a total turnover of £7500 per annum plus on the evenings and weekends, she sings at weddings and other special occasions which provides an income of £5000 per annum. Although neither of these roles individually have a turnover of £10k, the combined turnover will be above the threshold and therefore Dani will have to complete quarterly returns and an EOPS for both businesses separately and combine the income on the final declaration.  

Wesley has two properties, one he lets out to students and another that he lets out to a young family. He receives a total of £27k from both properties. He will need to register and follow the rules for MTD for ITSA

So what will you have to do?

Speak to your Accountant or bookkeeper to check that you fall within the parameters of MTD for ITSA and if your accounting year is different to the financial year, look at changing this so it aligns.

Look at your current processes. With MTD, you are required that you keep digital records of your accounts and the records are transferred digitally on to your HMRC submissions. If you are currently using an accounting software, it is likely that you will already comply with this, however if you use a spreadsheet, you will need to look into a ‘bridging’ software that will transfer the information. There is no copying and pasting allowed.

Sign up to MTD prior to April 2024. Not only will you have to sign up and complete your quarterly returns for MTD for ITSA during the first year, but you will also have your self-assessment for the year 23/24 to complete. This can be a lot of work that can get very confusing if you are using a new software package.