In exactly two years’ time the most fundamental change to the administration of the UK tax system for at least 20 years will have commenced. Making Tax Digital for Income Tax (MTD for ITSA) will apply to all self-employed businesses and landlords with business and/or property income of at least £10,000 as from April 2024. The first quarterly updates will be due for filing by 5 August 2024, covering either the quarter ended 5 July 2024, or 30 June 2024 (where a calendar quarter election is in place allowing quarterly updates to the end of the previous month).
To date not much information has been forthcoming from HMRC to the general public about MTD for ITSA and you could be forgiven for thinking that the process had been ‘put on hold’ as implementation has been delayed at least twice. However, on 1 July 2022, HMRC published draft legislation for consultation. These draft notices provide additional information regarding:
- the use of software integration with HMRC’s systems
- the information that will be required when submitting a quarterly update or end of period statement; and
- retail sales elections.
Further guidance will apparently be published later in the year explaining how HMRC intends MTD for ITSA to work in practice, including how accounting and tax adjustments should be made.
What is MTD?
As a reminder – businesses that are VAT registered are already within the MTD system (MTD for VAT) requiring VAT returns to be submitted digitally using MTD compatible software (paper records no longer being allowed). When the system has been fully utilised, it will be mandatory for almost all businesses, landlords, partnerships and companies with income greater than £10,000 to use software or a spreadsheet to keep their accounting records. Self-employed business and landlords will be brought into the system as from April 2024 (MTD for IT), general partnerships in the tax year beginning in April 2025 and it is intended that companies will be joining in April 2026 (although the rules for MTD for CT have not been published as yet).
The requirement will be to submit updates to HMRC each quarter directly from accounting software, within one month of the end of each quarter. Once the quarterly summary has been submitted, the system will estimate the amount of tax due – the idea being to help the taxpayer plan for their forthcoming tax bill more effectively. Submission of an ‘End of Period’ statement (EOPS) will also be required which will finalise the tax position of the trade or business. It will be on this form that any tax and accounting adjustments will be made (e.g. claim for capital allowances).
A further and final declaration will bring together all information required to calculate the final tax liability, including the information shown on the EOPS and any other non-MTD income (e.g. dividends and interest). This final ‘return’ will have the same submission and payment date as now – i.e. 31 January following the relevant tax year. A key difference between the year-end declaration and a current tax return will be that HMRC intends to pre-populate some of the return figures e.g. bank interest, income from employment, pensions, etc.
An important point to note is that in a publication issued by HMRC on 1 July 2022 (Notices made under regulations 3, 8, 12 and 16 of the Income Tax (Digital Requirements) Regulations 2021 (SI 2021) No. 1076)) it was announced that sole trader and landlords required to join MTD for ITSA with income under the VAT threshold (currently £85,000), will be able to submit three-line accounts (i.e. a total figure for income, a total for expenses and a final total). Those businesses over the VAT threshold will be required to submit income and expenses by category with property income split between UK and overseas, Furnished Holiday lets and other types of letting. Furnished Holiday lets will be split into UK and EEA holiday let businesses.
April 2024 may seem a long way off but preparation will be key. There will be penalties for late or non-submission of the quarterly updates which will work in a similar way to speeding fines, with a point added each time a deadline is missed.