Making Tax Digital for Income Tax and Self Assessment (“MTD for ITSA”) launches from April 2023

Making Tax Digital for Income Tax and Self Assessment (“MTD for ITSA”) launches from April 2023 – is your small business affected?

If you have trading income and/or gross rental income over £10k per year, please read on…

HMRC’s ambition is to become one of the most digitally advanced tax administrations in the world and MTD is making fundamental changes to the way the tax system works – transforming tax administration so that it is:

  • more effective
  • more efficient
  • easier for taxpayers to get their tax right

If you joined Making Tax Digital for VAT from April 2019 you may already in good shape for the MTD for ITSA regime as your adviser will have developed a digital process that meets the ongoing requirements.  However, HMRC estimates that there are still 4 million businesses that pay income tax but who are not VAT registered so therefore not keeping digital accounting records at present.  These are the businesses who need to act soon to establish new financial processes to meet the new requirements.

What is it and who does it apply to?

Quarterly digital tax submissions will be mandatory for:

  • self-employed and partnership businesses earning over £10,000 in business and property income per year
  • income tax payers with property rental income over £10,000 per year
  • There are some exceptions to the joining date of April 2023 – trusts and estates, partnerships with a corporate partner and LLPs are excluded for now.

What needs to be reported and how?

Businesses and landlords who join MTD for Income Tax will need to send a quarterly summary of their business income and expenses to HMRC using MTD-compatible software. In response, they will receive an estimated tax calculation based on the information provided to help them budget for their tax. At the end of the year, they can add any non-business information and finalise their tax affairs using MTD-compatible software. This replaces the need for a Self-Assessment tax return.

The deadlines for finalising tax affairs and making payments are not changing. Businesses and landlords will be able to use their software to send all of the information that they need to under Self-Assessment, not just their business or rental income. This includes employment income, bank and building society interest, dividends, pension contributions, student loan repayment etc. Software developers will need to continue to build this additional functionality into their products, resulting in a richer experience for customers as MTD continues to develop.

How to keep digital records

When we refer to “MTD-compatible software”, we mean software that can integrate with HMRC systems to send updates to HMRC.

You will therefore need to use a compatible software package (for example Xero or QuickBooks) or othersoftware (like spreadsheets) that connect to HMRC systems.

If you use more than one software package to keep records and submit returns, you need to link them.  Someways you can link your software include:

  • using formulas to link cells in spreadsheets
  • emailing records
  • putting records on a portable device to give to your agent
  • importing and exporting XML and CSV files
  • downloading and uploading files

New software solutions are being developed all the time.  We are keeping up to date with developments to identify the most appropriate and cost-effective solutions for our clients and we will be in touch over the coming months if you are affected by the new regime.

Update for VAT registered businesses

VAT registered businesses with a taxable turnover of more than £85,000 have had to follow the rules for ‘Making Tax Digital for VAT’ since April 2019. From 1 April 2022 all VAT registered businesses must sign up, whatever they earn.

Please do contact your usual adviser at bennettbrooks if you have any questions or concerns in the meantime.