In addition to their focus on Making Tax Digital (MTD) for VAT, HMRC are also concentrating on MTD for Income Tax. Under the requirements of MTD for Income tax, individuals who are subject to income tax on the profits of their sole trader or property business will be required to keep their accounting records electronically (either using suitable software or on spreadsheet) and file quarterly returns to HMRC with details of their income and expenditure together with any other information that HMRC specifies. A final end of period statement will then be submitted after the tax year to complete the individual’s tax affairs. Despite these changes, the timing of tax payments will not and the current deadlines are expected to remain the same. Although there is an obligation to send income and expense information every 3 months, it is possible to send an update to HMRC more often, for example, if a more up-to-date tax estimate is required.
What is the timetable for MTD for ITSA?
In a written statement issued on the 23rd September 2021, the Government confirmed that MTD for ITSA will be introduced from April 2024, a 12-month delay from the original schedule. The scheme will affect sole traders and landlords with gross income over £10,000 per year. General partnerships will not be required to join MTD for ITSA until the tax year beginning in April 2025. The date at which all other types of partnerships will be required to join will be confirmed later. If your income is below £10,000 then you will continue using the existing Self-Assessment system.
You can check out the written statement here.
What are quarterly updates?
Every three months, you will need to send HMRC an update of your business income and expenses for your sole trader and/or rental property income.
The first tax return under this system will be due in the 4th month of the accounting period. If you prepare your accounts in line with the tax year, the accounting period will be ‘quartered’ as follows:
- 6th April to 5th July
- 6th July to 5th October
- 6th October to 5th January
- 6th January to 5th April
Your MTD software should prompt you when to file, but keep track yourself as it is on you to submit on time! The full details of deadlines are still to be confirmed by HMRC, but from draft regulations it appears reports will be due within one month of each quarter-end date.
What software do I need for MTD for ITSA?
You will need to use MTD for Income Tax-compatible software to store your digital records for any business you run, send the required information to HMRC, view HMRC’s estimate of the final tax bill and send a final declaration to finalise your income tax. The vast majority of cloud-based accounting software’s will be updated in time for MTD for ITSA. If you currently operate traditional desktop software, you will need to ensure it is updated in time for MTD for ITSA or look into how to integrate this with a bridging software.
We are strong advocates for utilising cloud-based software, regardless of your business size or legal status, so irrespective of the new MTD for ITSA legislation, we would encourage you to explore these options.
Can I opt out of MTD for ITSA?
MTD for Income Tax is not optional if you fall within its scope (that is, you’re a sole trader and/or landlord with an income over £10,000). You cannot simply choose not to take part. It is possible to apply to be digitally excluded if it is either impossible or impractical for you to use technology in the way that MTD requires.
Examples of this include those who do not have internet access due to their remote location and individuals who have disabilities that make utilising technology difficult or impossible. Some religions prohibit the use of technology in the way MTD demands. HMRC considers these reasons as valid for exemption, and there are other circumstances that fall within this scope too. However, it should be stressed that these really are exceptions and will apply only to a few.
If you have legitimate reason and wish to become digitally exempt, you will have to apply directly to HMRC and explain why.
How can I get ahead of the curve before MTD for ITSA launches?
- Check if you are required to submit under MTD: This is simple to work out, simply take your income from your sole trader business(es) plus your rental income from any property you own. If this is above £10,000, you will need to register when the time comes. It is not year clear which basis period individuals must use to calculate if their income is over £10,000 – but it will likely be based upon your previous Self-Assessment Return!
- Work out your Digital Start Date: This will be the same date as the start date as your first accounting period beginning on or after 6th April 2024. Most sole traders follow the tax year for their business, so if this applies to you, your Digital Start Date will be the 6th April 2024!
- Register in plenty of time before your start date: Currently it is unclear when you will be able to apply for the scheme, but keep your eyes out to avoid stress as the deadline approaches. You can currently register for the MTD for ITSA pilot, but the software support is extremely limited and registration is only possible for individuals with one sole trader business.
- Go cloud-based, NOW!: Avoid the overload of admin and get yourself set up on a cloud-based accounting software as soon as you can. Introducing a new system right on the deadline for you to use MTD for ITSA will only be a recipe for disaster. Iron out the kinks and get to know how the software operates in advance, putting yourself in the best position to move forward into the new digital age! Check out our introductory guide to Xero and 8 reasons why we love it!
If you are ready to get the ball rolling on your MTD for ITSA requirements, or have any questions on anything we have discussed (or haven’t!) in this article, then get in touch with our team via our website or give us a call on 01257 255521.