Making Tax Digital for income tax (MTD ITSA) – are you ready?
It is now less than a year until the first taxpayers come within HMRC’s new Making Tax Digital for income tax (MTD ITSA) reporting regime. The move is likely to represent a significant change for many of those affected. Here, we look at who is in MTD ITSA and from when, what it means in practice and how we can help.
Who is in MTD ITSA and from when
MTD ITSA is part of a wider set of changes aimed at improving the accuracy of business records and reducing the need to give HMRC information that they already hold. It only applies to individuals with self-employment and/or property income and is being implemented in stages as follows:
- from 6 April 2026 if annual self-employment and property income (taken together) exceeds £50,000;
- from 6 April 2027 if annual self-employment and property income exceeds £30,000; and
- from 6 April 2028 if annual self-employment and property income exceeds £20,000.
Those with income under £20,000 are currently unaffected, although the government is keeping this under review. A separate reporting facility will be developed for those with business or property income under £3,000, although at present no detail is available on what this might look like.
Exemptions from MTD ITSA include anyone who is ‘digitally excluded’ and some individuals in specific circumstances, such as those with no national insurance number or with a power of attorney.
Other types of income (including employment and pension income and income from partnerships) is not taken into account when determining whether the MTD ITSA thresholds have been reached, and the new regime does not make any changes to how tax liabilities are calculated or when payments are due.
MTD ITSA currently only applies to individuals: partnerships and trusts will continue to report under the existing Self Assessment system regardless of the level of their relevant income. Where, however, trust income is treated (and reported on a tax return) as arising directly to a beneficiary, it will form part of their income for MTD ITSA purposes.
What MTD ITSA means in practice
Once within MTD ITSA, individuals will have to keep digital records and provide quarterly updates of their self-employment and property income and expenditure to HMRC. Quarterly updates do not need to include accounting or tax adjustments, such as claims for capital allowances. Instead, these can be made after the end of the tax year, when final business and property figures will be reported alongside non-MTD income and expenses in a process similar to the current tax return.
A key aim of MTD ITSA is reducing errors in tax submissions. To help achieve this, the intention is that:
- taxpayers will keep their business records digitally;
- those records will be compiled in closer-to-real time (digital records for each quarter must be completed by the time the filing for that quarter is made); and
- once amounts are included in a digital system, they are not then manually re-entered. Instead, where information needs to be transferred between systems this transfer must happen digitally.
What you need to do to prepare
If you will fall into the MTD ITSA regime, there are some key steps you should take to get ready.
1) Understand your obligations
Before making any other decisions, it is important to know exactly what you will need to do.
For example. if you are self-employed and have no other income within the scope of MTD ITSA, you will need to keep digital records and submit updates for your self-employment business.
If you rent out a property as well as having a self-employment business, you need to keep two sets of digital records – one for the rental business and one for your self-employment – and submit two sets of quarterly updates. Individuals with more than one trade and/or a UK and an overseas property business will need to keep multiple sets of digital records and submit multiple updates.
2) Decide how you will keep digital records and submit quarterly updates
Once you understand what you need to do, decide how you want to meet those obligations. You can choose to do the record-keeping and in-year reporting yourself or appoint an agent to do some or all of the work on your behalf. If you already use accounting software or use a spreadsheet to record information, check whether it covers all your MTD ITSA income and that it is MTD ITSA-ready.
If you want to use an agent for some or all of the process, then you should agree how things will work with them. For example, will you just provide them with invoices and receipts, or will you need to ensure that the information in your software can be digitally linked with theirs? This is important even if you want to do all the in-year work yourself and just use an agent for your year-end filing.
3) Choose software (if needed)
If you already have software that will meet your needs when you are in MTD ITSA, or if you want your agent to do everything, including creating your digital records, you will not need additional software to be MTD-ITSA ready.
If you want to handle some or all of the MTD process yourself, choose software that meets the needs of your business. If you need to keep digital records for more than one self-employment or property business, for example, make sure it supports that. Consider whether your chosen software can provide other benefits that would support your business as well as make sure you comply with MTD ITSA.
How can we help?
Our private client team can help you get ready for MTD ITSA and provide ongoing support once you are in the regime. If needed, we can provide an end-to-end service, from setting up and keeping your digital records to submitting your end-of-year return. Alternatively, we can help you set up your own software if you would rather do some of the process yourself.
