Making tax digital for VAT has been around for a while now with the even the smallest VAT-registered businesses filing under the MTD framework from April this year.
The next stage is Making Tax Digital for Income Tax self-assessment (MTD for ITSA), which will be the new way of reporting income to HMRC.
Who is affected?
HMRC confirmed that MTD for ITSA will be introduced from April, 2024, for sole traders and landlords with gross income over £10,000.
All businesses in existence immediately before 6th April, 2023, will join MTD for ITSA from 6th April, 2024, regardless of their accounting period end.
The threshold of £10,000 applies to gross income or turnover, not profit, and it applies to the total gross income where the individual or entity has more than one trade or property business.
For example, if the individual has £5,000 of rental income and £8,000 of sales from a sole trader business, they will exceed the limit and be in scope.
What is required?
Under the requirements of MTD for ITSA, individuals subject to income tax on the profits of their trade or business, including landlords, will be required to keep their accounting records electronically using MTD compatible software and file quarterly returns to HMRC with details of their income and expenditure instead of sending a self-assessment tax return.
A final end of period statement will then be submitted after the tax year to include any final accounting adjustments to complete the individual's tax affairs.
Separate quarterly updates will be required for each trade or property business carried on by an individual.
Quarterly updates
All businesses within MTD for ITSA will have to provide quarterly updates of their income and expenses for the following periods regardless of their accounting period end:
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Period covered
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Filing deadline
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Quarterly update 1
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6 April to 5 July
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5 August
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Quarterly update 2
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6 July to 5 October
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5 November
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Quarterly update 3
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6 October to 5 January
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5 February
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Quarterly update 4
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6 January to 5 April
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5 May
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Alternatively, businesses can make a 'calendar quarter election' which allows them to draw up quarterly updates to the end of the previous month.
Where this election is made, the quarterly updates will be as follows:
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Period covered
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Filing deadline
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Quarterly update 1
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1 April to 30 June
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5 August
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Quarterly update 2
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1 July to 30 September
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5 November
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Quarterly update 3
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1 October to 31 December
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5 February
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Quarterly update 4
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1 January to 31 March
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5 May
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The first quarterly updates under MTD for ITSA will therefore be due for filing by 5th August, 2024, and will cover either the quarter ended 5th July 2024, or 30th June, 2024 (where a calendar quarter election is in place).
Although the frequency of reporting is to change, the timing of tax payments will not and the current system of payments on account and balancing payment by 31st January after the tax year is expected to remain in place for the foreseeable future.
What can I do to prepare?
It is important to start planning for this over the coming months to ensure you have the correct software in place to meet the MTD requirements.
There are essentially three different types of MTD compliant software:
- Software packages that can be used to keep digital records and file returns via HMRC's API.
- API enabled spreadsheets – spreadsheets with an inbuilt function allowing them to file returns via HMRC's API.
- Bridging software which can take return information from an existing spreadsheet and submit this to HMRC via their API.
The software required will vary on an individual basis. Please speak to your usual contact at RNS who can advise you on what will be most suitable for your needs.