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MTD for Income Tax

Article ID: 3127
Last updated: 24 Sep, 2021

HMRC's MTD Plan

Making Tax Digital (MTD) is HMRC’s plan to become one of the most digitally-advanced tax administrations in the world. This means that big changes are needed to our current tax system, affecting both how data is collected and how it is stored by HMRC. MTD will apply to VAT, Income Tax and eventually Corporation Tax affecting the majority of businesses and therefore agents over the next few years. The following information is based on guidance from HMRC and draft legislation, including consultation documents, at the time of writing (September 2021). The final regulations are expected to be published later in the year.

Who will need to join MTD for Income Tax?

MTD for Income Tax (MTD ITSA) is going to be introduced for individuals with unincorporated businesses, including property businesses, whose annual turnover exceeds £10,000. This turnover threshold will apply to an individual's total business and/or property income. For example, a person with £5,000 of trading income and £5001 property income will be required to join the MTD ITSA scheme.

The rules will also apply to partnerships with business or property income that only have individuals as partners.  All other partnerships (e.g. those that have corporate partners and Limited Liability Partnerships) are not required to join MTD for ITSA initially, but will be required to join MTD at a future date (to be confirmed).  

Trusts, estates, trustees of registered pension schemes and non-resident companies will not be required to join MTD for ITSA.  

Exemptions

In line with the exemptions for MTD for VAT, individuals should not have to follow the MTD for Income tax rules if any of the following apply:

  • It’s not reasonably practicable for them to use digital tools to keep their business records or submit quarterly returns due to age, disability, remoteness of location or any other reason (often referred to as ‘digital exclusion’).
  • They are subject to an insolvency procedure.
  • The business is run entirely by practising members of a religious society or order whose beliefs are incompatible with using electronic communications or keeping electronic records.

Where any of the above apply, the individual has to apply to HMRC to claim an exemption. 

When must a business join MTD ITSA  

All eligible unincorporated businesses, regardless of accounting period end, will be expected to join MTD ITSA on 6 April 2024. In addition, legislation has been drafted to change the reporting requirements for all businesses to be on a tax year basis (starting from 6 April 2024 to 5 April 2025), rather than on an accounting period basis. 

What will MTD for Income Tax involve?

As with MTD for VAT one of the main requirements of MTD for Income Tax is the necessity to keep a digital record of income and expense transactions, the totals of which have to be submitted to HMRC on a quarterly basis. The digital means for recording the data does not have to be the same software that submits the data, however, there should be a digital link between the recording software and the submission software. Spreadsheets are an allowable source for holding transactional data providing the data can then be imported into MTD compliant software for submission to HMRC every three months.

The quarterly submissions will contain totals of sales and expenses, analysed by defined categories, as per the breakdown currently required by the SA100 tax return. Balance sheets will not be required. Estimates are acceptable and the taxpayer (or accountant) is not required to declare that the quarterly submission is a complete or correct reflection of the net or gross income of the business. These quarterly 'period updates' will have to be filed one month after the period end. (Period ends will be set by HMRC and due to the drafted tax year basis change, it is likely that the filing deadlines for submissions will be fixed as 5 Aug, 5 November, 5 February and 5 May). Using the information that has been sent, HMRC can then provide an estimate of the tax liability.

A final end of period statement (EOPS) needs to be sent to HMRC, which confirms the income and expenses for the whole accounting year. At this point, a claim for allowances and reliefs can also be made and a final tax calculation obtained. The taxpayer must make a declaration of accuracy on the EOPS, once all the adjustments for the four quarters have been made.

What is TaxCalc doing to assist businesses and agents with MTD for Income Tax?

We are actively working on solutions as recognised by HMRC to make the transition into MTD for Income Tax as seamless as possible. Initially we will be providing a method to import your transactional data and submit your periodic updates to HMRC (MTD Business Filer). After the initial pilot phase, we hope to develop a transactional record keeping solution to comply with the digital record keeping requirements which will fully integrate with MTD Business Filer.

Read more about TaxCalc's MTD Business Filer

Although MTD for ITSA is not mandated until April 2024, HMRC is currently running a pilot scheme, allowing you to enrol your clients early and ensure that you and your systems are ready.  The current criteria for joining the pilot scheme are as follows:

  • Sole traders with income from one business and landlords who rent out UK property.
  • Self-Assessment tax returns and payments are up to date and you’re a resident in the UK
    for tax.
  • You cannot currently join MTD for Income Tax if you have income from any other source or if you have other payments you make that are taxable or that you claim tax relief on.

If you’re eligible and would like to participate in the BETA or you would like to be involved in how we will be shaping our MTD solutions, please get in touch with us at mtd@taxcalc.com

Article ID: 3127
Last updated: 24 Sep, 2021
Revision: 7
Views: 121
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Also listed in
folder Tax Return Production -> SA100 Individual Return