In two years the most significant change to the administration of the UK tax system for at least 20 years will have begun. Making Tax Digital for Income Tax (MTD for ITSA) will apply to all self-employed businesses, and landlords with business and/or property income of at least £10,000, from April 2024.
The first quarterly updates will be due for filing by 5 August 2024, covering either the quarter ended 5 July 2024, or 30 June 2024 (where a calendar quarter election is in place allowing quarterly updates to the end of the previous month).
Not much had been said about MTD ITSA until 1 July 2022, when HMRC published draft legislation for consultation. These draft notices provide additional information regarding:
- the use of functional compatible software;
- information required in quarterly updates;
- information required in end of period statements; and
- retail sales elections.
HMRC will, it is understood, publish guidance later in the year explaining how MTD for ITSA will work in practice, including how accounting and tax adjustments should be made.
What is MTD?
As a reminder, businesses that are VAT registered are already within the Making Tax Digital system (MTD for VAT) which requires VAT returns to be submitted digitally using MTD compatible software When the system is in place, it will be mandatory for almost all businesses, landlords, partnerships and companies with incomes greater than £10,000 to use software or a spreadsheet to keep their accounting records. Self-employed business and landlords will be brought into the system from April 2024 (MTD for ITSA), general partnerships in the tax year beginning April 2025 and it is intended that companies will be joining in April 2026 (although the rules for MTD for Corporation Tax have not been published yet).
The requirement will be to submit updates to HMRC each quarter directly from accounting software, within one month of the end of each quarter. Once the quarterly summary has been submitted, the system will estimate the amount of tax due. The intention being to help the taxpayer plan for their forthcoming tax bill more effectively. Submission of an 'End of Period' statement (EOPS) will also be required. This will finalise the tax position of the trade or business. It will be on this form that any tax and accounting adjustments will be made (e.g., claim for capital allowances).
A further and final declaration will bring together all information required to calculate the final tax liability, including the information shown on the EOPS and any other non-MTD income (e.g., dividends and interest). This final 'return' will have the same submission and payment date as now - i.e., 31 January following the relevant tax year. A key difference between the year-end declaration and a current tax return will be that HMRC intends to pre-populate some of the return figures, for example, bank interest, income from employment and pensions.
An important point to note is that in a publication issued by HMRC on 1 July 2022 (Notices made under regulations 3, 8, 12 and 16 of the Income Tax (Digital Requirements) Regulations 2021 (SI 2021) No. 1076)) it was announced that sole traders and landlords required to join MTD for ITSA with income under the VAT threshold (currently £85,000), will be able to submit three line accounts (i.e. a total figure for income, a total for expenses and a final total). Those businesses over the VAT threshold will be required to submit income and expenses by category with property income split between UK and overseas, Furnished Holiday Lets and other types of letting. Furnished Holiday lets will be split into UK and EEA holiday let businesses.
April 2024 may seem a long way off, but preparation will be key. There will be penalties for late or non-submission of the quarterly updates which will work in a similar way to speeding fines, with a point added each time a deadline is missed.
Please let us know if you have any queries about Making Tax Digital. Send us an email at enquiries@torgersens.com.
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