MTD for ITSA: What it is and how to prepare

Making Tax Digital for Income Tax Self Assessment (MTD for ITSA) offers self-employed business owners and landlords a new way to report their earnings and pay income tax. MTD ITSA hopes to revolutionise tax administration so it is easier for taxpayers to get their taxes right.

Who does MTD for ITSA affect?

Anyone who is a sole trader or a landlord with a total business and/or property income above £10,000 per year is mandated into MTD for ITSA from 6 April 2024.

Partnerships with individuals as partners and a business or property income of £10,000 will have to follow the MTD rules from 6 April 2025. They will no longer be required to submit a Self Assessment tax return on the income earned.

In addition, they are legally bound to digitalise the processes related to tax accounting. Partnerships comprising corporate partners, charities and limited liability partnerships (LLPs) are required to join the program at a date yet to be confirmed.

Therefore, incorporated businesses must use the Self Assessment system until a decision has been taken. Every year, they should submit a tax return listing what they have earned and what has been claimed as expenses and arrive at the final tax bill.

What is changing under MTD for ITSA?

Perhaps, the biggest change under the MTD program is that those affected will have to submit four quarterly updates about their business incomes and expenses instead of submitting a Self Assessment tax return to HMRC once a year.

In addition, they have to share an End of Period Statement (EOPS) and a final declaration on or before 31 January following the end of the relevant tax year.

What determines the £10,000 threshold?

The tax year two years before April 2024 (tax year 2022/23) is considered to establish whether a self-employed business owner or landlord has to enrol into MTD for ITSA mandatorily. 

Who is exempt from MTD for ITSA?

Estates, trusts, and trustees of registered pension schemes and non-resident companies are not required to join MTD for ITSA.

Correlation of tax year basis with MTD ITSA

When the consultation on switching to the tax year basis of assessment was announced in July 2021, there was discussion on whether there was enough time to introduce such a fundamental change to the tax law before MTDA for ITSA came into effect.

According to HMRC, the tax year basis is critical to operating MTD ITSA as the tax year switch to 2024/25 coincides with the sole traders being mandated into the MTD program from 6 April 2024. The taxman says the quarterly update figures will not offer an insightful estimation of the tax due by the business for the year.

MTD for ITSA: Delayed by a year due to COVID-19

What’s more – the tax year basis brings forward the start of MTD for ITSA for businesses with a 31 March year-end from 1 April 2024 to 6 April 2023.

However, because of the pandemic, MTD for ITSA was pushed back by one year, and now it commences from 6 April 2024, thus coinciding with basis year period reform. The base year for testing the MTD turnover threshold is the tax year 2022/23.

Steps to take to meet the requirements of MTD for Income Tax Self Assessment

If you are a sole trader or landlord affected by MTD for ITSA, there are a few things you have to sort out before the program commences in 2024. Even though there is still time, there is no harm in starting preparations from today because, frankly speaking, the list of tasks can overwhelm you.  So, here is what you need to do:

1. Sign up

No provision automatically switches you to MTD.  You or your accountant must sign up ahead of your first whole accounting period, starting on or after 6 April 2023. If you follow the tax year for your accounting period, you must sign up in advance of 6 April on an MTD-compatible software, such as FreeAgent, Xero, and Sage.

Do be aware that even if you are signed up for MTD for VAT, you still need to sign up separately for MTD for income tax as the schemes are separate.

2. Quarterly updates

As a part of the scheme, all unincorporated businesses will need to file quarterly returns on or before 5 August, 5 November, 5 February, and 5 May every year. These quarterly returns comprise total sales and expenses generated or incurred every three months.

Landlords, for instance, will need to provide updates on rental income but do not need to split it out by individual properties. The deadlines for submitting quarterly updates will remain the same for anyone who follows MTD for ITSA rules.

3. Maintain digital records

You have to keep digital records of all business incomes and expenses in sync with the existing tax record-keeping requirements. For instance, right now, you may keep records related to investments, savings, pensions, and certain types of grants in the case of Self Assessment.

4. End Of Period Statement (EOPS)

At the end of the accounting period, you have to finalise the taxable profit or loss through an EOPS. If you run more than one business that requires its EOPS, you must draft separate copies. If you are a landlord, you have to make EOPS covering all your property rental income. 

This process lets you confirm that the updates you have shared are correct, add any missing details about personal income, or adjust your reliefs and allowances.

5. Finalise your business income and pay your tax

By not later than 31 January following the end of the tax year, you must make a single final declaration, which involves bringing all the data together, including business and non-business incomes, to finalise your tax position and reach your final tax liability. In addition, pay your outstanding tax liability by 31 January each year.

Over to you

This might seem like a long list of admin tasks for you to do, and it is, but do not forget the software you choose is critical for ‘making tax digital.’ Having good accounting software will automate a great deal of your work, such as creating quarterly updates.

And if you need a helping hand in preparing you for MTD for ITSA, and even after it rolls out, you can always count on the expertise of the team at Golding Accountancy. We are supporting the self-employed and landlords in prepping for MTD smoothly. To find out more, please contact us.

Frequently Asked Questions (FAQs)

1. Do all self-employed people have to go digital?

Digital record-keeping is a core aspect of Making Tax Digital. Anyone who is a sole trader or a landlord with a total business and/or property income above £10,000 per year is mandated into MTD for ITSA from 6 April 2024. And that means digitalising the records of all your business incomes and expenses using HMRC-approved MTD-compatible accounting software.

2. What do I need to submit for MTD for ITSA?

You are required to submit three things for MTD for ITSA – quarterly updates, End of Period Statement (EOPS), and the final declaration.

3. What is MTD for the self-employed?

With the help of an MTD-compatible software, the self-employed – having a total income above £10,000 per year – can keep digital records of income and expenses and submit their quarterly updates and annual submissions.