Making Tax Digital (MTD) is HMRC’s initiative to streamline tax reporting and move businesses toward a fully digital tax system. Introduced in April 2019, MTD for VAT requires most VAT-registered businesses to use MTD compatible software to submit their VAT returns under the MTD VAT regime. There are some exceptions. The main one is being below the VAT registration threshold.
Making Tax Digital for Income Tax
The digital reporting is being extended to self-employed individuals and landlords under Making Tax Digital for Income Tax (MTD ITSA). The development and roll-out of MTD ITSA has not been smooth and we wondered whether the strategy would be reconsidered by HMRC following the general election, however, announcements made in the Autumn Budget 2024 have confirmed that the MTD ITSA project is continuing as previously proposed.
HMRC confirmed that if you want to sign up to live test in the year 2024/25, you should sign up between April and June 2024 to test a full cycle of the tax year before it becomes mandatory from 6 April 2026.
Reporting under MTD ITSA will require specialist software that will assist with preparation and submission of the required reports under MTD ITSA.
MTD ITSA Key Dates and Thresholds
The thresholds and deadlines for reporting under MTD ITSA if you are self-employed or a landlord are:
- 6 April 2026 if you have gross annual business or property income of more than £50,000 (important to note – gross turnover/income, not profit).
- 6 April 2027 if you have gross annual business or property income of more than £30,000 ;
- A yet to be determined date but within this parliamentary session – if you have an annual business or property income of more than £20,000.
As yet, there are no dates set for the implementation of MTD ITSA for partnerships and no date for MTD implementation for corporation tax.
Qualifying Income for MTD ITSA
The qualifying income will be the aggregate of the gross turnover and rental income from the individual’s trading and property businesses. Mandation from 6 April 2026 will be based on amounts reported on the individual’s 2024/25 self-assessment tax return.
Exemptions from MTD ITSA
Foster carers and individuals without National Insurance numbers will be exempt from MTD ITSA.
MTD ITSA requirements will also not apply to the following:
- Trusts, estates, trustees of registered pension schemes and non-resident companies (not expected to be required to join for the foreseeable future).
- Taxpayers tax resident outside of the UK in respect of their relevant foreign income. Such taxpayers will, however, need to comply with MTD ITSA for their UK self-employment and property income.
- Taxpayers who do not have a UK National Insurance Number (NINO).
- Trustees of charitable trusts or the trustees of exempt unauthorised unit trusts.
- Taxpayers claiming qualifying care relief (e.g. foster carers) for that source of income only.
- The underwriting business of members of Lloyds, distributions to shareholders in real estate investment trusts or distributions to participants in open-ended investment companies.
The professional bodies also expect that there will be further exemptions or more time provided to report in certain cases for example where the taxpayer die or is made bankrupt during a tax year.
Reporting Requirements
The government confirmed that the quarterly updates will be cumulative.
Where a trader or landlord has accounts drawn up to 31 March or 5 April (which all landlords will and the vast majority of the self-employed will, given the Basis Period Reform), the aggregates in each quarterly update will be in line with the taxable profits. There may be still some further adjustment required however, when self-employment accounts are drawn up to a different accounting period (not aligned with the tax year), the trader will be required to submit each quarterly update on time-apportioned sets of accounts rather than actual sets of accounts. For example: if the individual trader will have 31 December year end, the 2026/27 profit will be based on time apportionment of two sets of accounts running from 1 January 2025 to 31 December 2027 rather than actual results from 6 April 2026 to 5 April 2027.
There will be no ‘end of period statements’ required.
If the taxpayer has a gross annual income below the VAT threshold £90,000 (increased from £85,000 on 1 April 2024), 3-line accounts are required as follows:
- Income
- Expenses
- Profit/Loss
Aligned Deadlines for Quarterly Reporting
The quarterly reporting has been shifted by 2 days from 5th to 7th of the relevant month for MTD ITSA to be aligned with VAT MTD reporting.
Quarterly updates will be required for standard quarters, irrespective of a business’s accounting period.
Businesses will be able to elect to report for calendar quarters:
- 1 April to 30 June
- 1 July to 30 September
- 1 October to 31 December
- 1 January to 31 March
The deadlines for quarterly updates will be 7 August, 7 November, 7 February and 7 May following the end of the relevant quarter. Updates may be submitted more frequently and can be submitted up to 10 days early where the information for the quarter is known to be complete.
Compatible Software for MTD ITSA
Crucially, MTD ITSA will require a taxpayer to keep digital records that can be submitted to HMRC quarterly. This will require use of compatible software. You can find a list of software provider on HMRC website with some basic software details here. There are also lots of software in development and the list is confirmed on the website as well.
The software must be capable of:
- creating and storing digital records of your business income and expenses — you can choose to use spreadsheets with compatible software to do this.
- sending quarterly updates.
- submitting your tax return by 31 January after the end of the year; and
- receiving information from HMRC
Some compatible software lets you keep digital records of your business income and expenses. You can also use spreadsheets to keep digital records and compatible software to send updates to HMRC. This is known as bridging software.
It will be important to research before you choose a software and make sure the software suits your needs. We are researching and trialling various software solutions for MTD ITSA and will be discussing the relevant options, and our suggested route, with each impacted client on the lead up to the relevant implementation date.
Based on the research to date, we found that, if you are currently registered under VAT MTD then your software provider (Xero, Quickbooks, Dext etc) is likely to offer the quarterly reporting for MTD ITSA, therefore, it would be recommended to stay with the same provider.
Separate Digital Records
If you have more than one business, each business will require separate digital records and separate submissions for each business will be required. For example: there will be separate submission required if you are a landlord and a builder.
If you receive property income from multiple properties, you must keep separate records and make separate submission for each business – note that all let properties in the UK are treated as one ‘UK property business’ and any let properties outside of the UK are treated as one ‘foreign property business’ – so separate businesses.
If you own property overseas in more than one country, you need to keep separate digital records for each country you receive property income from.
In respect of the retail sales of the business the digital records mean a single digital record of daily gross takings for any retails sale made. The gross takings will include all transactions and all payments in cash/ cheque and non-cash (vouchers)/ payments in kind etc.
Turnover falling below the MTD ITSA threshold
The MTD ITSA regulations will allow taxpayers to stop complying with the requirements where their relevant turnover/gross income falls below the threshold or when the business ceases permanently. To prevent the possibility of taxpayers joining, exiting, and re-joining on a frequent basis as their turnover fluctuates, the requirements will cease to apply only when turnover/gross income falls below the threshold for three successive years.
The latest HMRC update notice to MTD ITSA, can be found here
Further Updates and Government Announcements
The Autumn Budget 2024 included several announcements on how HMRC will tackle non-compliance in the tax system, as well as an important update on making tax digital for income tax self-assessment (MTD ITSA). The government committed to the introduction of MTD ITSA in April 2026 (for those with turnover over £50,000). MTD ITSA will be rolled out in 2027 to those with turnover over £30,000 and, in a new announcement, to those with turnover of more than £20,000 by the end of this parliament (2029). There was no timeline provided for this change and the government will announce this at a future fiscal event.
Conclusion
MTD ITSA represents a significant shift in how self-employed individuals and landlords manage their tax obligations. Early preparation and adopting suitable software will be key to navigating this transition smoothly.
We will be providing more guidance via our email updates, and website posts, as and when guidance is released by HMRC.
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