Making Tax Digital for Income Tax

Many businesses and individuals are used to filing quarterly accounts of their income and expenses for VAT purposes and Making Tax Digital (MTD) for VAT became mandatory for all VAT registered businesses from April this year.

However, quarterly filing is due to be extended to a much wider range of individual taxpayers from April 2024, with those affected being required to use software to keep digital records and file quarterly returns of their income and expenses.

What is MTD for Income Tax Self-Assessment (ITSA)?

Under MTD for ITSA, rather than sending one annual tax return after the end of the year, individuals will be required to send quarterly updates to HMRC of their business and/or property income and expenditure.

After the end of the fourth quarter, an End of Period Statement will need to be submitted to finalise each business income source which will include any accounting adjustments. A Final Declaration must also be submitted on an annual basis to report all other sources of income, such as employment, savings, and investment income.

Those caught by the new MTD rules will be required to keep and maintain digital records and use MTD compatible software to file their returns with HMRC.

When will this take effect?

The new rules will apply from April 2024. Originally the change was set to take place from April 2023, but in September last year the Government announced that this would be delayed by 12 months.

Will I be affected?

MTD for ITSA will apply to sole trade businesses and landlords with a total gross business and/or property income of more than £10,000 per year. It is the gross income, before any expenses are deducted, which is relevant for this purpose.

What do I need to do?

If you think that you will be required to file under MTD for ITSA, now is a good time to start thinking about your record keeping. You may like to start keeping digital records yourself, or you may want to speak to your accountant about how they can help you with this over the coming months.

There are some exemptions for those who are unable to comply with the new reporting regime by reason of religion, age, disability, or remoteness of location, where it is not reasonably practicable for you to use digital tools to keep your business records or submit your returns.

MTD for ITSA is going to bring a fundamental change to how the majority of individual taxpayers report their income to HMRC. This is set to be the biggest change to the tax system since the introduction of self-assessment back in 1996.
HMRC hopes that the introduction of MTD for ITSA will reduce the number of errors made by taxpayers and it is another step towards their ambition of being one of the most digitally advanced tax administrations in the world.

At Westcotts, we are busy working behind the scenes to make sure our business and our clients are prepared for the change, in advance of April 2024. We will be contacting all our affected clients in due course, but if you would like to discuss this further then please do get in touch.