MTD for ITSA

Important update at December 2021 regarding MTD for ITSA

The government has now delayed the implementation of Making Tax Digital for Income Tax Self-Assessment (known as ‘MTD for ITSA’) until 6 April 2024, with MTD for general partnerships postponed to 2025. The change to the tax year basis for unincorporated businesses has also been delayed until at least April 2024.

The delays were announced to ensure businesses and landlords have sufficient time to prepare for MTD for ITSA in the aftermath of the COVID-19 pandemic because there will be an additional administrative burden and filing requirement for all those who meet the criteria.

Who does MTD for ITSA apply to?

MTD for ITSA applies to an individual, partnership or trust with total business and/or property income above £10,000 per year. To be clear, the threshold of £10,000 applies to total gross income or turnover. For example, if an individual has £5,000 of rental income and £6,000 of sales from a sole trader or partnership business, they will be in the scope of MTD for ITSA because the total income (in this case £11,000) exceeds the threshold of £10,000.

What records need to be kept and submitted to HMRC?

Accounting records must be kept electronically (using compatible software or on a spreadsheet) and be filed quarterly with HMRC. The records must provide details of income and expenditure together with any other information specified by HMRC. 

A final end of period statement or return (called “EOPS”) will then be submitted after the tax year ends to complete the individual’s tax reporting.

Although the frequency of reporting is to change, the timing of tax payments will not and the current system of payments on account by 31 July and balancing payment by 31 January after the tax year should remain in place.

Reporting requirements

Quarterly updates

All businesses within MTD for ITSA will have to provide quarterly updates of their income and expenses for the following periods, by the following deadlines, regardless of their accounting period end:

 

Period covered

Filing deadline

Quarterly update 1

6 April to 5 July

5 August

Quarterly update 2

6 July to 5 October

5 November

Quarterly update 3

6 October to 5 January

5 February

Quarterly update 4

6 January to 5 April

5 May

 

Alternatively, businesses can make a 'calendar quarter election' which allows them to draw up quarterly updates to the end of the previous month.  Where this election is made, the quarterly updates will be as follows:

 

Period covered

Filing deadline

Quarterly update 1

1 April to 30 June

5 August

Quarterly update 2

1 July to 30 September

5 November

Quarterly update 3

1 October to 31 December

5 February

Quarterly update 4

1 January to 31 March

5 May

 

The first quarterly updates under MTD for ITSA will therefore be due for filing by 5 August 2024, and will cover either the quarter ended 5 July 2024, or 30 June 2024 (where a calendar quarter election is in place).

We understand that separate quarterly updates will be required for each trade or property business carried on by an individual.  There is no requirement to make tax or accounting adjustments to the information provided in quarterly updates.

Penalties

To align with the introduction of MTD for ITSA in 2024, a new penalty regime is being introduced for Income Taxpayers required to use MTD in the tax year beginning in April 2024. For all other Income Tax taxpayers, the new penalty regime will be introduced in the tax year beginning in April 2025.

Each late submission of a return will result in a point. The penalties are summarised in the table below:

Past due date

Penalty

1 to 15 days

Nil

16 to 30 days

2% of tax due

31 days and over

4% of tax due, plus 4% per annum

 

In addition, each late submission of a return will result in a “point”. A £200 fixed penalty will be applied for each omission where the points threshold has been exceeded. The threshold for quarterly ITSA is four points. All points expire after a 12-month period, provided return obligations are met.

What other changes were announced?

  • Simple partnerships will not be required to join MTD for ITSA until the tax year beginning in April 2025. 
  • HMRC will confirm at a later date when complex partnerships will be required to join.

Tax year basis

HMRC wishes all unincorporated businesses (such as sole traders) to switch to the tax year basis before the introduction of MTD ITSA in April 2024. The government hasn't yet responded to the consultation completed on the change. 

What this means for you, our clients:

If you are a sole trader or a landlord and your income exceeds £10,000 from your businesses, you will need to be ready for MTD for ITSA by April 2024. 

If you are a sole trader and your trading period does not match the tax year, you will need to make arrangements to switch by April 2024.   

If you wish to discuss any of the above or digitise your record keeping ahead of the mandatory changeover date, please do not hesitate to speak to your usual contact at bennettbrooks.