Background to Making Tax Digital for Income Tax Self-Assessment
The crux of MTD for ITSA revolves around the obligation for businesses and landlords to maintain digital records and provide updates to HMRC every quarter, utilising compatible software.
Errors in managing tax affairs contribute to the tax gap (the amount of tax due but unpaid). For Self-Assessment businesses, this gap is around 18.5%, or £5 billion. Utilising software for digital record-keeping and regular updates has been proven to reduce error potential and time spent on corrections, thereby supporting business productivity.
MTD aims to streamline tax compliance, making it more accessible and accurate for everyone. Many other countries have already implemented similar systems or are in the process of digitalising their tax systems.
Originally announced in the 2015 Budget and following formal consultation in 2016, HMRC implemented the first phase of MTD from April 2019 for VAT-registered businesses. Building on the success of MTD for VAT, the government announced in December 2022 that MTD for ITSA would be extended to businesses, self-employed individuals, and landlords with income over £50,000 from April 2026. Those with income over £30,000 would be mandated from April 2027.
Phased implementation for landlords and sole traders
Following the release of an updated Policy Paper published in February 2024, businesses, self-employed individuals, and landlords will be required to operate MTD from 6th April 2026, if their total qualifying income from trading and property income chargeable to Income Tax and Class 4 National Insurance contributions exceeds £50,000. From 6th April 2027, this requirement extends to those with income exceeding £30,000.
The new MTD for ITSA regulations mandate relevant individuals to maintain and preserve tax records electronically and submit reports to HMRC using approved software. These reports must include details of trading or property income, allowable expenditure, and claims for allowances or reliefs for each tax year. Quarterly interim cumulative reports must also be submitted on fixed dates specified in the regulations.
Implications of MTD for ITSA and adjustments
While the government views MTD for ITSA as a pivotal measure to mitigate tax errors, its introduction may necessitate adjustments to current accounting practices. This might entail a more meticulous approach to bookkeeping to meet the requirement of quarterly returns submission.
It is estimated that approximately 780,000 individuals with business or property income over £50,000 will join the MTD for ITSA scheme from April 2026, with a further 970,000 joining from April 2027. These measures are expected to improve businesses’ experience of dealing with HMRC as managing their tax affairs will be simpler. While there are transitional costs estimated at around £561 million, businesses may experience reduced errors, streamlined processes and minimised penalty fees in the long term.
What are the updated MTD requirements for sole traders and landlords?
Further to our previous blog on MTD for ITSA, HMRC delivered the results of their consultation on the elements required of MTD for ITSA in the November 2023 Autumn Statement as follows:
Improving the design of quarterly updates:
- Customers must send summary updates of their business and property income and expenses to HMRC every 3 months as simple summaries generated from digital record-keeping software, requiring little more than a 'check and send' if using MTD-compatible software.
- Following stakeholder feedback, updates will now represent cumulative totals of income and expenses accumulated during the tax year to-date, simplifying corrections without resubmitting previous updates.
- The government will continue to support the use of 3-line accounts within MTD for customers with turnover below the VAT registration threshold, simplifying expense categorisation.
Simplifying processes by removing end of period statements:
- The government acknowledges that End of Period Statement (EOPS) is effectively a duplication and added complexity, and agrees to remove this requirement, as MTD-compatible software minimises its necessity therefore enhancing the customer experience of the MTD service.
Introducing easements for landlords with jointly-owned property:
- Landlords with jointly-owned properties face challenges in computing their share of income and expenses each quarter, necessitating burdensome record transfers. To alleviate this, landlords can choose not to submit quarterly updates for expenses related to jointly-owned properties, reducing in-year administration.
Enabling customers to be represented by multiple tax agents within MTD for ITSA:
- Acknowledging the common use of tax agents by MTD customers, the government will develop a solution allowing multiple agents to represent a customer.
- This flexibility accommodates varied reporting requirements, such as quarterly updates and end-of-year processes, potentially managed by different agents.
Are there any exemptions for MTD for ITSA?
The government has been clear that if a business cannot go digital, it will not be required to do so. HMRC continues to work with the MTD Accessibility Working Group and the Additional Needs Working Group to support all customers.
For those moving to digital, especially those needing extra support, HMRC’s customer support model includes:
- a multi-layered approach stretching across agents, third party software support, telephony support, webchat
- HMRC’s Extra Support service including accessible online content including recorded webinars, YouTube videos and e-learning
- GOV.UK content including help pages, signposting to information, guides, and to local or third-party providers of digital skills courses, or support already provided by external providers.
Furthermore, recognising limited benefits or barriers for certain groups, MTD requirements will be exempted for foster carers and individuals unable to obtain a National Insurance Number. The exemption for those without a National Insurance Number will be temporary, with the intention of subsequent mandating into MTD once obtainable.
LWA are here to support your MTD for ITSA transition
At LWA, we understand that Making Tax Digital for Income Tax Self-Assessment marks a significant shift in tax compliance for sole traders and landlords. As your trusted business advisors, with careful preparation and proactive support, we can help by offering comprehensive guidance on adopting suitable accounting systems and providing any necessary training to navigate the transition seamlessly with confidence and ease. Contact our Corporate Tax team headed up by Nickie Antley-Slater via email to mail@lwaltd.com or call 0161 905 1801 in our South Manchester office or 01925 830 830 in Warrington.