Making Tax Digital income tax self assessment is mandatory from April 2024. Certainty about the date and most of the requirements has been created by the MTD ITSA regulations laid in September 2021. ICAEW's Tax Faculty outlines how it is likely to work and the progress of the pilots.
Making Tax Digital income tax self assessment (MTD ITSA) applies to those who receive income from self-employment and/or property where, gross income from these sources combined is above a threshold of £10,000. The current regulations do not cover partnerships; MTD ITSA is expected to be extended to general partnerships from April 2025. All references in this guidance to businesses includes the self-employed and landlords.
The primary and secondary legislation for MTD ITSA is in place. Some of the detail will be in tertiary legislation and guidance which is not yet available. HMRC’s guide for software developers is a useful source of information on detailed design.
MTD's impact on unincorporated businesses
When MTD ITSA becomes mandatory, businesses within scope are required to:
- maintain digital accounting records in a software product or spreadsheet. Maintaining paper records will no longer meet the legislative requirements; and
- submit quarterly and end of period statements (EOPS) to HMRC and finalise their tax position after the end of the tax year. The quarterly updates and end of period statements will need to be submitted using a functional compatible software product that can access HMRC’s application program interfaces (API) platform.
Businesses within scope need to acquire a suitable commercial software product or appoint an agent to submit information to HMRC on their behalf. HMRC’s paper and online self assessment tax return will remain available only to taxpayers outside the scope of MTD ITSA (and is likely to be replaced with a system similar to ITSA in due course).
MTD ITSA does not change:
- the underlying income tax rules (other than in relation to record keeping);
- the amount of detail submitted to HMRC which remains the same as the current self assessment tax return (more detailed records will need to be kept and updates will need to be sent quarterly); or
- the current filing and payment deadlines for income tax.
Who is in?
MTD for ITSA requirements apply to those who receive income from self-employment or property. There is an exemption for those with an annual turnover/gross income below a threshold of £10,000. This threshold is applied to the total turnover/gross income from all sources of self-employment and property income.
MTD ITSA requirements will not apply to:
- General partnerships (expected start date is April 2025);
- Limited liability partnerships and partnerships with a corporate or other ‘non-natural person’ member (expected to be required to join at a future date, to be confirmed);
- Trusts, estates, trustees of registered pension schemes and non-resident companies (not expected to be required to join for the foreseeable future);
- Taxpayers domiciled or resident outside the UK in respect of their relevant foreign income. These taxpayers will need to comply with MTD ITSA for their UK self-employment and property income;
- Trustees of charitable trusts or the trustees of exempt unauthorised unit trusts,
- The underwriting business of members of Lloyds, distributions to shareholders in real estate investment trusts or distributions to participants in open ended investment companies.
ICAEW expects that further exemptions, or more time for certain cases, may be required in due course. For example, there are practical problems with cases where the taxpayer has no national insurance number or where the taxpayers dies or is made bankrupt during a tax year.
When does it start?
MTD ITSA starts on 6 April 2024. The first quarterly updates, for the quarter 6 April to 6 July 2024, are due on 5 August 2024. Assuming that basis period reform is enacted as planned, the first end of period statements (EOPS), for the tax year 2024/25, are due on 31 January 2026.
Note that the way the start date works has changed significantly compared with earlier drafts of the regulations.
If a business is trading at 5 April 2023, it is required to comply with MTD ITSA from 6 April 2024 if it exceeds the £10,000 turnover threshold in the 2022/23 tax year (ie, the decision is based on the 2022/23 tax return due to be filed on 31 January 2024).
New businesses and those that exceed the £10,000 turnover threshold for the first time are required to comply with MTD ITSA from 6 April in year three (ie, if a business first exceeds the turnover threshold in 2025/26, they are required to comply with MTD ITSA from 6 April 2027).
When determining whether the £10,000 turnover threshold is exceeded, if the relevant reference period is less than 12 months the qualifying income must be adjusted proportionately on a time or other just and reasonable basis.
An exemption for the digitally excluded is included in the regulations and mirrors the current exemption for MTD VAT. The exemption covers those that that do not use computers for religious reasons and those that are unable to comply because of age, disability or location (or for any another reason).
Difficult cases will arise, particularly where an individual has some basic digital skills such as being able to send emails but would not be able to cope with accounting software or a spreadsheet. There is no specific age at which the exemption applies; each case will be taken on its merits. Location covers those who cannot obtain access to broadband because of where they are located. The exemption will not apply to those who could sign up for broadband but have not done so.
HMRC is expected to issue further guidance on how to apply for exemption, in advance of MTD ITSA becoming mandatory in 2024.
The government has given an undertaking that free MTD ITSA software will be made available to businesses with the most straightforward affairs.
HMRC’s working assumption is that these businesses will be those that are unincorporated, have income under the VAT threshold, and have no employees. HMRC does not expect to develop any software itself but will work with the software industry to develop free software products.
The use of spreadsheets, either to record individual transactions or as part of a suite of software and spreadsheets is permitted. However, the spreadsheet must be either API enabled or used in combination with an MTD compatible software product so that data can be sent to and received from HMRC systems; an existing spreadsheet on its own is not a free solution for complying with the MTD ITSA requirements. There is a requirement for digital links where the accounting records use a combination of software products and/or spreadsheets.
The regulations state that MTD ITSA functional compatible software must be able to:
- maintain digital records;
- preserve those digital records;
- provide a quarterly update; and
- provide an end of period statement - (EOPS)
MTD ITSA pilot
The MTD ITSA pilot started in April 2017 on a tiny scale - to those invited to join the private beta pilot. The pilot moved from private beta to public beta in March 2018, but the number of taxpayers in the pilot remained very small. HMRC returned the pilot to private beta status in December, meaning that taxpayers can only join the pilot by arrangement with their software provider.
In broad terms, the eligibility criteria for joining the pilot are:
- taxpayers with income from one or more sole trades and/or income from letting UK property (including furnished holiday lettings); and
- who use a 5 April accounting date for their income from self-employment and property; and
- who are UK resident, are registered for self assessment and whose returns and payments are up to date; and
- who did not claim coronavirus job retention scheme or self-employment income support scheme grants; and
- who do not need to report income or gains from any other sources or make other payments that are taxable or on which they claim tax relief.
Some software providers may be able to allow a slightly wider group of taxpayers to join the pilot.
HMRC expects to publish a pilot plan and roadmap in early 2022. The pilot is expected to be expanded significantly in April 2022.
Digital record keeping requirements
The requirement to keep digital records does not mean that businesses have to scan and store invoices and receipts digitally. Businesses can continue to keep documents in paper form if they prefer, but each individual transaction (not summaries) has to be recorded and stored digitally.
HMRC would like to encourage records to be kept in as near to real time as possible, but it is still possible to create the digital records at quarterly intervals, using a bookkeeper or other agent if required, provided the information is entered into a digital record keeping system prior to the quarterly update being submitted.
The draft regulations state that the following records need to be maintained digitally:
- the amount of each transaction;
- the date of the transaction, according to the basis used (cash or traditional accounting); and
- the category into which the transaction falls. These categories will be specified in tertiary legislation and are expected to be the same as those that are currently used for the full self-employment and property sections of the self assessment tax return (SA103F and SA105).
Individuals with income from property are required to comply with MTD ITSA and there is some associated complexity with how the requirements apply to jointly held property and different property businesses: UK property, overseas property, UK furnished holiday lettings and EEA furnished holiday lettings; further clarification has been sought from HMRC.
Where a property is jointly owned, each individual is required to keep digital records for their share of income and expenditure. How this will work in practical terms, say with multiple properties owned in different proportions, is a significant area of concern. Digital record keeping applies to an individual's property business as a whole rather than property by property.
The regulations allow retailers to elect to keep digital records in accordance with a 'retail sales notice'. A retail sales notice is expected to allow the recording of daily gross takings rather than individual transactions (mirroring VAT); this will be confirmed in tertiary legislation.
Further exemptions covering situations where it would be impractical, impossible or unduly onerous to maintain digital records for each transaction are likely to be needed but have not been included in the regulations.
- 6 April to 5 July
- 6 July to 5 October
- 6 October to 5 January
- 6 January to 5 April
Businesses can instead elect to report for calendar quarters:
- 1 April to 30 June
- 1 July to 30 September
- 1 October to 31 December
- 1 January to 31 March
Note that if a business intends to elect to report for calendar quarters it is likely to be more straightforward for them to do so from the start and join MTD ITSA from 1 April 2024 rather than 6 April 2024; the first five days are effectively voluntary.
The deadlines for quarterly updates are 5 August, 5 November, 5 February and 5 May following the end of the relevant quarter. Updates may be submitted more frequently and can be submitted up to 10 days early where the information for the quarter is known to be complete.
The information to be included in a quarterly update is set out in an ‘update notice’ which requires the following details:
- Designatory information
- Details of the properties that form the property business
- Totals of the amounts falling within specified categories of transactions, derived from the digital records
The categories for the transaction summary will be specified in tertiary legislation and are expected to be the same as those that are currently used for the full self-employment and property sections of the self assessment tax return (SA103F and SA105).
Under the current self-assessment system, businesses with annual turnover below the VAT threshold are eligible to use ‘three-line accounts’, meaning only income, expenses and profit need to be reported. Tertiary legislation may allow these small businesses to continue to reporting only these three lines of data. However, the record keeping requirements mean that they have to use the full list of categories when recording their transactions.
Separate quarterly updates are required for each business. For example, an individual operating as a sole trader who also has a UK property business would need to submit eight quarterly updates a year.
The quarterly updates are a simple summary of transactions; there is no requirement to make tax and accounting adjustments as if they were full tax returns, or any expectation that such adjustments would be made. Quarterly updates do not include a declaration from the taxpayer and inaccuracy penalties do not apply.
End of period statement (EOPS)
An EOPS is equivalent to the relevant section of the current self assessment tax return (eg, SA103 or SA105) and its purpose is to finalise the end of year tax reporting for each business. Each self-employment, UK property business and overseas property business as applicable requires an EOPS.
EOPS include information for a tax year (subject to the provision in the proposed basis period reform rules that allows accounting to 31 March rather than 5 April). Note that EOPS are completely independent of quarterly updates and won’t necessarily be easily reconciled with those quarterly updates, especially for businesses that do not use a 31 March or 5 April accounting date. The deadline for EOPS for finalising taxable profit for a period is 31 January following the end of the relevant tax year (the current self assessment deadline).
The information to be included in an EOPS is set out in an ‘end of period notice’ which requires the following details:
- Designatory information
- Details of the properties that form the property business
- Totals of the amounts falling within specified categories of transactions
- Details of: (i) adjustments, allowances, balancing charges or costs, (ii) losses or exemptions; and (iii) reliefs and allowances.
These details will be further specified in tertiary legislation, but the expectation is that EOPS will require information very similar to that required by the relevant section of the current self assessment tax return.
The EOPS could be submitted at the same time as the final quarterly update for the year, (eg, in the case of a simple business that has adopted cash accounting). Businesses that need to make year-end adjustments or claim capital allowances or other reliefs are more likely to submit their EOPS later.
Neither the quarterly updates nor the EOPS finalise (or as HMRC terms it ‘crystallise’) the liability to income tax, although an EOPS completes the reporting for each self-employment and property income source for the tax year. HMRC will use the quarterly updates and EOPS to play back estimates of the predicted liability, but these are merely illustrative and for taxpayers with multiple income sources and/or more complex affairs are likely to be inaccurate.
The final step of finalising the liability involves bringing together the information submitted on the EOPS (of which there can be more than one) with information about the taxpayer’s other sources of income and details of other claims etc that form part of the self assessment tax return.
In some cases, it will be possible to use the same MTD ITSA software that is used for the quarterly updates and EOPS to finalise the liability. In others it will be necessary to use separate tax software or the new online system that is being built by HMRC.
Note that this finalisation takes place in a new HMRC backend system which is separate from HMRC’s current CESA system that supports self assessment.
Leaving MTD ITSA
The MTD ITSA regulations allow taxpayers to stop complying with the requirements where their relevant turnover/gross income falls below the £10,000 threshold or when the business ceases permanently. To avoid the possibility of taxpayers joining, exiting, and re-joining on a frequent basis as their turnover fluctuates, the requirements cease to apply only when turnover/gross income falls below £10,000 for three successive years. For example, if a taxpayer is required to comply with MTD ITSA for 2024/25 and their turnover/gross income falls below £10,000 in the tax years 2025/26, 2026/27 and 2027/28 they do not have to comply with MTD ITSA requirements from 6 April 2029 (the start of the tax year following the finalisation date for 2027/28).
Self assessment requirements and the legal position of pilot participants
The legal position of individuals in the MTD ITSA pilot who are finalising their tax affairs for 2018/19 and subsequent years by completing the MTD end-of-year process rather than filing an self assessment return was initially unclear. Although those in the pilot are finalising their tax position when the primary legislation for MTD ITSA is on the statute book, neither the legislation or regulations are yet in force.
HMRC published (on 14 March 2018) a commissioners’ direction which allows those in the MTD ITSA pilot to use relevant software to deliver information equivalent to a personal return and self-assessment under sections 8 and 9, Taxes Management Act 1970. This direction provides the necessary certainty that completing the MTD for income tax end-of-year process satisfies the obligation to file a self assessment tax return.
- 23 Nov 2021 (12: 00 AM GMT)
- Updated to reflect the MTD ITSA regulations published on 23 September 2021