On 23 September 2021, the Income Tax (Digital Requirements) Regulations 2021 (S1 2021/1076) for MTD ITSA were passed by Parliament, opening the gateway for MTD ITSA to commence on 06 April 2024. This is a one year delay from the initial plan to introduce MTD ITSA to allow businesses more time to recover from the pandemic.
We know a lot of small business owners are confused and concerned about what Making Tax Digital for Income Tax Self Assessment means for them and their business. But with the right knowledge, guidance and preparation, you have nothing to worry about.
Here’s everything you need to know!
What it is
Making Tax Digital for Income Tax Self Assessment (snappily known as MTD for ITSA) is a new way of reporting earnings to HMRC. It’s part of the government’s ambition to become one of the most digitally advanced tax authorities in the world while providing a digital service that many have come to expect in their everyday lives.
According to Luzy Frazer, Financial Secretary to the Treasury, “the digital tax system we are building will be more efficient, make it easier for customers to get tax right, and bring wider benefits in increased productivity.”
The changeover to digital should allow you to have a better understanding of your business. You’ll be aware of your tax liabilities at a much earlier stage and be able to manage cash flow and decision making in a more informed way than ever before.
Evidence shows that many businesses currently operating under MTD (the same requirements for VAT kicked in a while ago) are already experiencing wider benefits and reductions in input errors.
Sounds great, right?
Who is affected
You will be affected by MTD for ITSA if you earn income greater than £10,000 per year from:
- Self-employment
- General partnerships with only individuals as partners
- Property businesses (UK and overseas)
This means that all sole traders and individual landlords whose turnover (not profit) is in excess of £10,000 and are in business on 5 April 2023, will have to comply with MTD regulations from 6 April 2024. The turnover threshold includes your income from all sole-trader businesses, plus rental income. General partnerships will not be required to join MTD for ITSA until the tax year beginning in April 2025.
Who is exempt
You can check if you can apply for an exemption or opt out from Making Tax Digital through HMRC. Basically you can also apply for an extension if it is not “reasonable or practical” for you to use the technology required to follow MTD for ITSA rules. This could be due to age, disability, religion or other reasons, and the HMRC will consider each application for exemption on a case by case basis.
What it means for you
Affected business owners and landlords will no longer file an annual self-assessment tax return. Instead, each business will need to file four quarterly updates, an End of Period Statement (EOPS), and a Final Return with any other income, gains or reliefs to HMRC using MTD-compatible software
That’s worth repeating. Instead of filing one tax return a year, you will have to make six separate filings. And if you have more than one self employed business, or you are also a landlord, you will have to file two or more quarterly updates every quarter!
At the moment HMRC have said that MTD will not change when you need to pay your tax. However we wouldn’t be surprised if that changes in the future.
The standard quarterly submission dates will be 5 July, 5 October, 5 January and 5 April. The reporting deadlines are exactly one month later.
You can elect to report your quarterly updates using calendar quarter dates – 30 June, 30 September, 31 December and 31 March. You may want to do this if you don’t have a 5 April accounting year end. The reporting deadlines will not change.
What does using MTD-compatible software mean
The most critical change is the requirement to keep digital accounting records and submit tax returns using MTD-compatible software. There will be a lot of options out there, make sure you take the time to look for something that will help you to run your business better. It is easy to get hung up on how difficult it will be to make the change. However there are huge benefits out there for businesses that have up to date digital records. If you want to read more have a look at using Xero if you are a landlord, and some of our tips for getting the most out of Xero.
What can go wrong
There will always be problems when any new system is brought in. The big issue here is that there is clearly going to be an overlap of work between the current Self Assessment Return system and the new Making Tax Digital requirements. This is made worse if your accounting year end is not 5 April.
But what exactly does that mean for you? We’ll break it down using two examples: one is a business with a standard 5 April year end, while the other is a business with a 31 March year end.
Submission dates for 5 April accounting year end and 6 April 2024 digital start-up date:
| MTD Quarter / SA Return / EOPS | Income & expenses period | Deadline for submission |
| Year 1 Quarter 1 | 6 April 2024 – 5 July 2024 | 5 August 2024 |
| Year 1 Quarter 2 | 6 July 2024 – 5 September 2024 | 5 November 2024 |
| SA Return 2023/24 | Year to 5 April 2024 | 31 January 2025 |
| Year 1 Quarter 3 | 6 September 2024 – 5 January 2025 | 5 February 2025 |
| Year 1 Quarter 4 | 6 January 2025 – 5 April 2025 | 5 May 2025 |
| Year 2 Quarter 1 | 6 April 2025 – 5 July 2025 | 5 August 2025 |
| Year 2 Quarter 2 | 6 July 2025 to 5 September 2025 | 5 November 2025 |
| EOPS 1 | Year to 5 April 2025 | 31 January 2026 |
However, look at how the reporting changes for a business with a 31 March year end:
Submission dates for 31 March accounting year end and elected calendar quarters for quarterly updates:
| MTD Quarter / SA Return / EOPS | Income & expenses period | Deadline for submission |
| Year 1 Quarter 1 | 6 April 2024 – 30 June 2024 | 5 August 2024 |
| Year 1 Quarter 2 | 1 July 2024 – 30 September 2024 | 5 November 2024 |
| SA Return 2023/24 | Year to 31 March 2024 | 31 January 2025 |
| Year 1 Quarter 3 | 1 October 2024 – 31 December 2024 | 5 February 2025 |
| Year 1 Quarter 4 | 1 January 2025 – 31 March 2025 | 5 May 2025 |
| Year 2 Quarter 1 | 1 April 2025 – 30 June 2025 | 5 August 2025 |
| Year 2 Quarter 2 | 1 July 2025 – 30 September 2025 | 5 November 2025 |
| SA Return 2024/25 | Year to 31 March 2025 | 31 January 2026 |
| Year 2 Quarter 3 | 1 October 2025 – 31 December 2025 | 5 February 2026 |
| Year 2 Quarter 4 | 1 January 2026 – 31 March 2026 | 5 May 2026 |
| Year 3 Quarter 1 | 1 April 2026 – 30 June 2026 | 5 August 2026 |
| Year 3 Quarter 2 | 1 July 2026 – 30 September 2026 | 5 November 2026 |
| EOPS 1 | Year to 31 March 2026 | 31 January 2027 |
So having a 31 March year end will delay the filing of the first EOPS by a whole year!
What you can do next
As you can see, there is an overlap with filing the 2023/24 tax return using Self Assessment and the first two MTD for ITSA quarterly statements to HMRC. This could mean extra work and confusion for small business owners.
But, with anything, you can save yourself stress and time by preparing early. Our advice is not to delay your preparation for these changes. The more time you allow yourself to get everything in order and iron out any problems, the smoother the transition will be for you.
If you’d like more advice on how you can get your business ready for MTD for ITSA, you can contact the Starfish team here.
