If you’ve heard about Making Tax Digital (MTD) then you might be aware that changes are coming for anyone that pays Income Tax via Self-Assessment.
It was only in April of this year that it became a requirement for all VAT registered businesses to comply with the new MTD requirements. The Government have been implementing the MTD changes in stages and in just under two years the MTD for Income Tax Self-Assessment (ITSA) rules will also apply.
What is Making Tax Digital
MTD is a transformative digital initiative from the government which aims to simplify the processes by which individuals and businesses manage their tax affairs and file their tax returns. The initiative utilises digital record-keeping and tax data-reporting software and apps to more effectively manage tax reporting and minimise tax errors, which it is estimated to cost the government billions of pounds a year.
The introduction of the programme began in 2019 and has slowly been rolling out across various areas of tax reporting. The most recent changes applied to VAT registered businesses from April 2022, with Income Tax Self-Assessment next on the agenda for 2024, and Corporation Tax compliance likely to come into effect from 2026.
Who will be affected by the MTD ITSA changes?
If you currently file a self-assessment income tax return and have business and/or property income of more than £10,000 per year, then you will be affected by the MTD ITSA changes when they come into force.
Additionally, members of ordinary business partnerships who earn more than £10,000 a year, will need to register for MTD for ITSA by 6 April 2025.
In certain cases, it may be possible to apply for a MTD ITSA exemption if it’s not practical for you to use software to keep digital records or submit them to HMRC digitally. This could be because of your age, disability, location (ie poor broadband connection) or another justifiable reason. MTD exemption can also be granted on religious grounds.
When are the MTD ITSA changes coming?
It was originally planned that MTD for Income Tax Self-Assessment would be introduced by the Government in April 2023. However, the continued impact of COVID-19 as well as feedback from key stakeholders, meant that it has been delayed until April 2024.
While it will be mandatory for anyone with taxable income in excess of £10,000 to comply with the changes from April 2024, it is also possible to sign up now for MTD for ITSA voluntarily. In order to do this, you must be a UK resident; registered for Self-Assessment with up-to-date returns and payments; a sole trader with income from one business, or a landlord who rents out UK property.
Note: It is not yet possible to sign up for MTD for ITSA if you need to report income from any other sources (eg share dividend payments).
Why should you voluntarily sign up to MTD for ITSA
There are certain benefits to signing up early to MTD for ITSA and these include:
- Get a head start with the new system before it becomes a legal obligation
- Resolve any problems you may encounter with the new system in advance of April 2024
- Benefit from real time reporting as explored in more detail below
Your MTD ITSA responsibilities
Once you have signed up to MTD for ITSA there are number of things you must do and most importantly, you will need to keep detailed, regularly updated digital records for all your business income and expenses. This must be completed using MTD-compatible third-party software which is also then used to report your tax data to HMRC every three months.
The GOV.UK website lists third-party software that is compatible with Making Tax Digital for Income Tax. Even if you have software which you suspect is compatible, you should double check this and if you have been using a spreadsheet-based system, this definitely won’t be suitable, and you will need to find suitable ‘bridging software’ (which is also listed by HMRC)
The quarterly summary reports which are generated by the software and must be sent to HMRC, will show how much tax you owe based on the information provided and this will help to budget for your end of year tax bill.
You will also need to make a final declaration at the end of the tax year and pay your Income Tax bill by 31 January of the following year.
Finally, don’t forget that you will need to send HMRC a Self-Assessment tax return for the tax year before you signed up for MTD for Income Tax.
In the meantime, while you are not yet signed up to MTD ITSA, you will still need to submit two payments per year as usual.
Real-time Recording – What are the benefits
By taking advantage of real-time recording through the new MTD ITSA system, your business will save time maintaining financial records and managing tax administration, and ultimately be more productive, with more resources available for other business activities.
With more up-to-date records you will also have a more accurate picture of your business cash flow and general finances, which allows for better control and the ability to make more informed business decisions.
There is also a reduced risk of mistakes when using MTD compliant software, which saves time further down the line when correcting basic errors.
Penalties for Late Submission
In an effort to make sanctions for late submission and late payment fairer across all taxes, the Government is also introducing a new penalty system. From the perspective of MTD ITSA customers with business or property income over £10,000 per year, the changes will apply from the tax year beginning 6 April 2024. All other ITSA customers will be subject to the new penalty system from 6 April 2025.
The new MTD penalty system operates by allocating points for late submission. For each missed deadline, one point is allocated and on reaching a certain threshold, a £200 fine will be issued. The thresholds are determined by submission frequency, with annual submissions attracting two points, quarterly submissions attracting four points and monthly submissions attracting five points.
Further Guidance on MTD for ITSA
The GOV.UK website provides a range of supporting HMRC guidance on Making Tax Digital for ITSA, including:
- Check if you can sign up for Making Tax Digital for Income Tax
- Check when to sign up for Making Tax Digital for Income Tax
- Sign up as an individual for Making Tax Digital for Income Tax
- Using Making Tax Digital for Income Tax
Alternatively, feel free to call the Kingston Burrowes team for further advice regarding how you can prepare for the April 2024 MTD ITSA changes.