MTD income tax self assessment

Making Tax Digital income tax self assessment (MTD ITSA) will apply 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 those with income from property.

The primary and secondary legislation for MTD ITSA is in place. Some of the detail will be in tertiary legislation and guidance that is not yet available. HMRC’s guide for software developers is a useful source of information on details of the design.

When MTD ITSA becomes mandatory, businesses within scope will be 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 EOPS will need to be submitted using a functional compatible software product that can access HMRC’s application program interfaces (API) platform.

Businesses within scope will 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 (SA) tax return will remain available only to taxpayers outside the scope of MTD ITSA. For those outside MTD ITSA, the SA tax return is likely to be replaced with a new (but similar) system in due course).

MTD ITSA will 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 SA tax return (although 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.

MTD for ITSA requirements will apply to those who receive income from self-employment or property. There will be an exemption for those with an annual turnover/gross income below a threshold of £10,000.

This threshold will be applied to the total turnover/gross income from all sources of self-employment and property income. It will be applied against specific boxes on the SA return (listed below). Anything not included in these boxes will not count towards the threshold for joining MTD ITSA.

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, will 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.

MTD ITSA starts on 6 April 2024. The first quarterly updates, for the quarter 6 April to 6 July 2024, will be due on 5 August 2024. The first end of period statements (EOPS), for the tax year 2024/25, will be due on 31 January 2026. 

If a business is trading at 5 April 2023, it will be 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 will be 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 will be required to comply with MTD ITSA from the start of the third tax year (ie, if a business first exceeds the turnover threshold in 2025/26, they will, unless there is late notification, be 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 will be 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 will not be a free solution for complying with the MTD ITSA requirements. There is a requirement for digital links where the a combination of software products and/or spreadsheets is used.

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)

• Read more information from ICAEW on MTD compatible software and how to choose a suitable product

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 2021, 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 trade 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
• have a national insurance number; and
• who are UK resident, are registered for SA and whose returns and payments are up to date; 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.

The requirement to keep digital records will 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. However, it will still be 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 regulations state that the following records will 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 SA tax return (SA103F and SA105).

Individuals with income from property will be required to comply with MTD ITSA and there is remains uncertainty over how the requirements will apply in practice to jointly held property and different property businesses: UK property, overseas property, UK furnished holiday lettings and EEA furnished holiday lettings.

Where a property is jointly owned, each individual will be required to keep digital records (and submit updates) 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. It is not yet clear how HMRC interprets ‘transaction’ and whether entering totals from, for example, supplier or letting agent statements will be accepted.

Quarterly updates will be required for standard quarters, irrespective of a business’s accounting period.

The standard quarters are:

• 6 April to 5 July
• 6 July to 5 October
• 6 October to 5 January
• 6 January to 5 April

Businesses will be able to 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 will be 5 August, 5 November, 5 February and 5 May following the end of the relevant quarter (so those that elect for calendar quarters get an extra five days). 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 to be set out in an ‘update notice’ and will include:

• 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 SA tax return (SA103F and SA105).

Under the current SA 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 is expected to allow these small businesses to continue to report only these three lines of data and to allow them to not categorise expenses when recording transactions.

Separate quarterly updates will be 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.

It will be possible to resubmit quarterly updates to correct omissions, duplications, and other errors.

EOPS is the name for the “end of period statement” annual process which will finalise the reporting for each MTD business. Each self-employment, UK property business and overseas property business as applicable will require an EOPS.

The EOPS includes two steps:

1. Step one is the BSAS (business source adjustable summary). This involves the software retrieving the totals of the quarterly updates submissions from HMRC systems. It is at this stage that the tax and accounting adjustments needed to adjust the quarterly updates to the final figures for the year are made and submitted to HMRC.

2. The second step is the EOPS declaration. This is a declaration that the figures for the income source are final.

The EOPS will be for a tax year (subject to the provision in the basis period reform rules that allows accounting to any date between 31 March and 5 April). The deadline for finalising the figures for each business and making the EOPS declaration will be 31 January following the end of the relevant tax year (the current SA deadline).

The design for businesses with accounting dates that do not fall within the period 31 March to 5 April has not yet been developed.

The information to be included in an EOPS will be set out in an ‘end of period notice’ and will include:

• 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 SA tax return.

It will be possible to submit the EOPS 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 tax and accounting adjustments or claim capital allowances or other reliefs are more likely to submit their EOPS later.

It will be possible to resubmit the EOPS at any time up to the 31 January deadline. After that date, an amendment under s9ZA, Taxes Management Act 1970 would be required.

Neither the quarterly updates nor the EOPS will finalise the liability to income tax, although the EOPS will complete 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. For taxpayers with multiple income sources and/or more complex affairs, these estimates are likely to be inaccurate.

The final step of finalising the tax liability will involve 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 SA 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 or preferable to use separate tax software or the new online submission service 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 SA.

The MTD ITSA regulations will 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 will 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 will 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).

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 a 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.