What You Need to Know
Making Tax Digital (MTD) for Income Tax Self-Assessment (ITSA) is a significant change in the way self-employed individuals and landlords with income over £30,000 report their income and expenses to HMRC. This shift aims to make the tax system more efficient, effective, and easier to navigate, bringing the UK tax system into the digital age. If you are affected by MTD for ITSA, it is essential to understand the changes and how to prepare effectively.
Why is HMRC doing this?
The Government’s policy paper published in December 2022 says. “Making Tax Digital (MTD) will exploit the opportunities offered by digitalisation to make it easier for everyone to get tax right. Many other countries have already done this or have digital systems in development.”
“Errors in handling tax affairs contribute to the tax gap — the amount of tax that is due but goes unpaid. The tax gap for Self-Assessment businesses is around 18.5%, or £5 billion. Using software to keep digital records and make regular updates has been shown to reduce the potential for error and time spent making corrections, and thus support business productivity.”
Making Tax Digital for VAT was introduced in April 2019 for VAT-registered businesses above the VAT threshold. After delays in implementation of MTD for ITSA caused by economic conditions and the Covid-19 Pandemic the Government is now committed to a timetable
Understanding MTD for ITSA
MTD for ITSA requires that you maintain digital records of your income and expenses and submit quarterly updates to HMRC using compatible software. Additionally, you will need to submit an End of Period Statement (EOPS) and a Final Declaration at the end of each tax year.
Who will be affected?
If you are self-employed or a landlord with business or property income exceeding £30,000 per year, you must comply with MTD for ITSA from April 2026. Even if your income falls below this threshold, you have the option to voluntarily join MTD for ITSA.
The rollout of MTD for ITSA will happen in two phases:
- From April 2026: Sole traders and landlords with annual business or property income over £50,000
- From April 2027: Those with income between £30,000 and £50,000
If your income from these sources is below £30,000, you will not be required to follow MTD rules for now, though you can voluntarily opt-in if desired.
The key changes to expect.
- Quarterly reporting: Instead of filing one annual tax return, you will need to submit updates to HMRC every three months. These updates will be cumulative, covering your income and expenses for the tax year to date.
- Digital record-keeping: You will need to use MTD-compatible software to keep digital records of your business transactions.
- End-of-period statement and final declaration: After the tax year ends, you will submit an end-of-period statement to finalize your business income. You will also file a final declaration, which replaces the current Self-Assessment tax return, to report any other income or claims.
How should you prepare for Making Tax Digital?
- Assess your situation: Determine when MTD for ITSA will apply to you based on your income levels.
- Choose MTD-compatible software: Research and select software that suits your needs and complies with HMRC requirements.
- Start digital record-keeping: Even if you are not required to join MTD immediately, begin keeping digital records to ease the transition.
- Review your processes: Consider how you will gather and input information quarterly rather than annually.
- Consult a professional: Speak with an accountant or tax advisor to understand how MTD for ITSA will impact your specific situation.
What are the benefits of MTD for ITSA for your business?
MTD offers several benefits that can simplify tax reporting and enhance financial management:
- Real-time Insight into Your Tax Position: MTD empowers you to stay on top of your tax affairs throughout the year, minimising the likelihood of unexpected tax bills.
- Reduced Errors: Digital record-keeping diminishes the chances of errors and facilitates the identification of discrepancies, ensuring accurate tax reporting.
- Enhanced Efficiency: Automating tax calculations streamlines the process, saving you valuable time and effort.
- Improved Communication with HMRC: MTD enables seamless interaction with HMRC, making it easier to seek assistance and support whenever needed.
The key to success with MTD for ITSA lies in preparation, organisation, and staying informed. By taking the necessary steps now, you can ensure a smooth transition and enjoy the benefits of this digital transformation in the UK tax system. Gardner Webb Accounting can advise on the most suitable software option for your business, as it is easy to become overwhelmed by the choices and TV adverts.
This is one of the biggest changes in the tax system since VAT was introduced in the 1970s meaning that professional advice will be the best way to overcome the challenges MTD presents to sole traders and landlords. Get in contact with the Gardner Webb Accounting team today to learn how it will affect you.