Making Tax Digital for income tax
It’s the end of the tax return as we know it – Making Tax Digital for income tax self-assessment, or MTD for ITSA, is set to roll out from April 2023.
If you haven’t heard of it before, MTD is a Government programme that’s being gradually rolled out to different areas of the tax system, requiring taxpayers and businesses to keep their records digitally and use software to submit updates to HMRC.
Its first mandatory stage, MTD for VAT, began in April 2019, and it’s now scheduled to extend to more businesses and landlords who currently submit self-assessment tax returns. Eventually, it’ll become a requirement for corporation tax too.
Anyone included in MTD for ITSA will need to:
- keep digital records of business income and expenses
- use MTD-compatible software to send quarterly updates to HMRC and submit a ‘final declaration’ of their income at the end of the year.
Who’s included in MTD for ITSA?
In HMRC’s words, “all ITSA customers earning more than £10,000 business and property income per year are required to join MTD from April 2023.”
So if you’re already required to fill out a self-assessment return, and your business and property income is more than that threshold, you’ll need to be ready to follow the rules.
There are a few exceptions, though. Trusts, estates, trustees of registered pension schemes and non-resident companies are not required to join, and neither are certain types of complex partnerships.
Another important point to note is that the £10,000 figure is for combined income. If you earn £9,000 a year through your business, for example, and £2,000 by renting property, you’ll be over the threshold and included in MTD for ITSA.
So, self-assessment is going digital. But with online filing already available
– around 96% of returns were filed online ahead of 2021’s January deadline
– and personal tax accounts already available through HMRC’s website, what’s different about MTD?
For one thing, the record-keeping requirements are new.
Under MTD for ITSA, taxpayers need to keep a digital record of all their business or property income and expenses.
If up until now, you’ve been putting everything on paper then entering the figures into your tax return at the end of the year, you’ll need to switch to a fully digital system instead.
Another big difference is the requirement to send quarterly updates. Four times a year, you’ll need to send HMRC a summary of your business income and expenses using your accounting software.
Then, at the end of your accounting period, you’ll have to submit a declaration that finalises your income and expenses and includes any other personal income or reliefs.
For most people, the deadline for this will fall on 31 January after the end of the tax year, effectively replacing the self-assessment tax return.
Finally, the link between your records and the software you use to send updates should be digital. In other words, copying and pasting from a spreadsheet into your accounting software won’t be accepted under MTD rules.
What are the benefits?
All of this adds up to a system designed to provide a real-time, accurate readout on your tax position throughout the year.
Of course, this has its benefits for HMRC, giving the organisation better quality data for the purposes of tax collection but it can help you too.
Instead of saving all your receipts for the end of the tax year, you’ll be entering that information as you go. That should make it easier to keep on top of your finances, as well as ensuring your final tax bill doesn’t come as a nasty surprise.
If you’re not already using cloud accounting software, this is by far the easiest way to make sure you’re complying with MTD well ahead of the deadline.
We particularly love working with Xero – it’s packed full of useful features, flexible enough to scale as your business grows, and easy to integrate with hundreds of other apps and software packages.