Making Tax Digital For Income Tax
Updated: Sep 7
MTD For Income Tax is launching 6th April 2024
Also known as (MTD for Income Tax Self Assessment; MTD for ITSA)
What is MTD?
HMRC is introducing a new digital tax administration system called ‘Making Tax Digital’. It involves businesses keeping digital records of transactions and using HMRC approved software to send digital records and tax returns to HMRC.
The aim is to improve the accuracy of the information and decrease the tax gap - it is estimated that an additional theoretical £32bn should have been paid to HMRC in 20/21.
MTD for Income Tax is being introduced on the 6th of April 2024.
Who is MTD for Income Tax aimed at?
Both of these groups will need to follow the MTD for Income Tax rules from 6th April 2024:
Self-employed businesses with gross annual business income above £10,000
Landlords with gross property income above £10,000
HMRC’s assessment of whether your income qualifies you for MTD for Income Tax will be taken from your 22/23 Self Assessment tax return. Once you’re in the MTD for Income Tax scheme, you’re in for at least 3 years, even if your income tax drops below £10,000.
How do I find out if MTD for Income Tax applies to me?
Submit the normal 22/23 Self Assessment tax return by 31st Jan 2024 as usual;
HMRC will check to see if your qualifying income is more than £10,000;
If it is, HMRC will confirm in writing that you must follow the MTD for Income Tax rules by 6th April 2024.
What you need to do if Making Tax Digital for Income Tax Applies to you
1. Start using software that is MTD for Income Tax compliant
You/your agent must find and start using software that is compatible with Making Tax Digital for Income Tax by 6th of April 2024 (see below for more info on software).
2. Submit quarterly MTD for Income Tax returns
The quarterly returns, submitted to HMRC will document your income and expenses for the quarter. The quarterly periods and deadline for submissions are as follows:
At a later date, companies will be able to elect to use ‘calendar quarters', which will make the first period 1st April 2024 to 30th June 2024 instead. However, the submission deadlines will remain the same.
Separate quarterly updates will be required for each trade or property business carried out by an individual.
3. Submit an annual End of Period Statement (EOPS)
This will be similar to the self-employment or property pages of the current Self Assessment tax return. Any accounting adjustments will be documented and the tax position finalised.
A separate EOPS will be required for each trade or property business.
The deadline for submission of the EOPS is the 31st of January following the end of the tax year.
4. Submit an annual Final Declaration
The final declaration brings together all the business and personal information to determine the final tax liability, including information from the EOPS and information from any non-MTD sources of income, like dividends and interest.
Only one Final Declaration will be required for each taxpayer. The deadline for submission of the Final Declaration is the 31st of January following the end of the tax year.
5. Make payments to HMRC
Although the frequency of reporting is changing, the timing of tax payments will not.
The current system of payments on account by 31st of January and 31st of July, and balancing payment by 31st of January after the tax year is expected to remain in place.
What about businesses with accounting periods that don’t align with the tax year?
7% of sole trader/self employed businesses have accounting dates that don’t align with the tax year (i.e. don’t end on 31st of March or 5th April). HMRC has yet to adequately address what MTD for Income Tax means for these businesses.
If this is you, I would advise you to seek advice from an accountant or tax professional as soon as possible.
It may make sense to align your 22/23 accounting period to the tax period in order to simplify things, but you need to understand the implications of changing your accounting period vs keeping it the same.
If you decide to go it alone, you’ll need to understand the existing basis period rules.
What's MTD for Income Tax compatible software?
All of the main accountancy software providers are upgrading their software for MTD for Income Tax, so if you already use something like QuickBooks, Xero or Sage, you or your agent will be able to submit the returns to HMRC from within the software - just as businesses currently can for MTD for VAT.
If you keep your records on something like Excel, you can carry on with this but you will have to use MTD compliant bridging software which can take the data from Excel, and submit it to HMRC.
Those that keep records on a paper-based system will find the transition to MTD for Income Tax the hardest and we recommend that you plan for it well ahead of time and consider, if you don’t already have one, engaging an accountant to help you.
The current list of compatible software for MTD for Income Tax is here.
The impact of MTD for Income Tax
The additional reporting requirements will undoubtedly mean more work for you/your agent.
There could also be additional costs for you, for instance, software costs, and potentially the additional costs of engaging an accountant to manage this for you.
However, the quarterly returns will also mean that you will have a far better picture of how your business is doing throughout the year, and you will also have a better idea about the tax liability that you are building up. This means you will be able to plan better throughout the year.
If you don’t already use accounting software for your business, this is an opportunity to systemise and automate your record keeping, which in turn can save you time and hassle:
You can automate processes like the creation of estimates and invoices; automatically send out recurring invoices and chase late payers.
Data about business transactions can flow straight from your bank to your books so you can see your current financial position at any time
In an instant, you can see who owes you money, what bills are due, and what your cash flow looks like
Multi-user access means you can collaborate online with your team and advisors
MTD for Income Tax launches on 6th of April 2024.
Make sure you are prepared ahead of time.
If you’re not already using an accountancy software package for your book-keeping, then talk to your accountant if you have one, or start exploring options to see which option is best for you and start using this before April 2024, so you are familiar with it.
If you don’t want to manage the new regime yourself, then find an accountant that can help you and do this well ahead of time - our details are below! 👇👇👇👇
If you leave this until the last minute, you may struggle to find someone with capacity.
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