Making Tax Digital for Self-Assessment

MTD ITSA

What exactly is Making Tax Digital for Self-Assessment ?

Making Tax Digital for Self-Assessment is part of a governmental initiative that requires businesses store their financial data as well as process and submit their taxes digitally. It affects taxes: VAT (Value Added Tax), ITSA (Income Tax Self-Assessment) and Corporation Tax. MTD is an acronym for Making Tax Digital which you may come across quite often.

This is not an entirely new approach to keeping accounting records though. Over the past few years, businesses have had to meet new requirements with respect to how their transactions are recorded and how their taxes are produced and submitted.

Admittedly, it can be confusing and hard to understand for business owners exactly what their obligations will be under the new rules. However, the purpose of this governmental initiative is to streamline the process of managing and submitting tax returns, because not only that incorrectly filed taxes cost the government several billion pounds per year, but they cause businesses disruption, stress and possible fines, too.

In this blog I will focus on Making Tax Digital for Self-Assessment (also known as MTD ITSA, which is an acronym for Making Tax Digital for Income Tax Self-Assessment) and I will answer burning questions such as: What businesses are affected by Making Tax Digital for Self-Assessment and what do you have to do to be compliant with these new rules ?

What businesses are affected by MTD ITSA ?

Self-employed sole traders and landlords with annual business or property income above £10,000 will need to follow the rules for Making Tax Digital for Self-Assessment (MTD ITSA) from 6 April 2024. 

The threshold of £10,000 refers to gross income or turnover, in other words to the total amount of income that your business generates before expenditure is deducted. So, if your total income from business is £10,000 or more, then even if you have expenditure that brings your net profit down to let’s say £2500, which is way below the threshold, you will still have to register for Making Tax Digital for Self-Assessment (MTD ITSA) because your total income reached the £10,000.

General partnerships (i.e. partnerships whose partners are all individuals) will not be required to join Making Tax Digital for Self-Assessment until the tax year beginning 6 April 2025. The date on which all other types of partnerships (for example, partnerships whose partners are corporate, and Limited Liability Partnerships) will be required to join will be confirmed later (date to be confirmed by HMRC).

What do businesses need to do to be MTD ITSA compliant ?

It will no longer be allowed to simply log in to the historic HMRC portal and manually type in and submit the Self-Assessment tax return figures. From 6 APR 2024, sole traders who are required to comply with the new rules will have to use MTD compatible software to:

  • keep records of their income and expenditures digitally
  • submit to HMRC a quarterly summary of income and expenses
  • submit to HMRC and end of year report

 

The software they will have to use will be either a compatible software package or a bridging software to file the UK Self-Assessment tax return via an API link (a link that bridges the accounting software with the HMRC portal). API is short for Application Programming Interface.

You will have to install and use an HMRC- approved accounting software to store your financial data and to calculate and submit your tax returns. You can find a list of HMRC- approved accounting software here.

When does Making Tax Digital for Self-Assessment start ?

Making Tax Digital (MTD) is being introduced for Income Tax Self- Assessment (ITSA) from 6 April 2024.

What are the important dates for Making Tax Digital for Self-Assessment ?

With these new rules, there will be 5 tax returns per yea: 4 are quarterly updates and 1 end of year report. The dates to remember are given below:

Type

Accounting Period

Deadline to submit to HMRC

Quarter 1

5 APR – 5 JUL

5 AUG

Quarter 2

6 JUL – 5 OCT

5 NOV

Quarter 3

6 OCT – 5 JAN

5 FEB

Quarter 4

6 JAN – 5 APR

5 MAY

End of Year*

6 APR 2024 – 5 APR 2025

1 JAN 2026

*The financial year 6 APR 2024 – 5 APR 2025 was taken as example. The accounting period and deadline to submit the Self-Assessment tax return for the following financial years follows the same pattern.

Are paper records still allowed ?

You can still keep paper records such as notebooks or paper receipts, but from 6 APR 2024 you are required to also keep these records in digital form using accounting software. Though so far you may have found it useful to keep your records on a spreadsheet, you may still do so if you find it helps you better organise your records, but you must have accounting dsoftware in place into which you can upload the spreadsheet. This will ensure your records are MTD compliant.

When will payments be due for Self-Assessment tax returns?

Under the new rules, the end of year Self-Assessment tax return will still have to be submitted by 31 JAN of the year following the tax year. This is also the deadline for making payments.

Sole traders who would like to ease the burden of paying their taxes in one lump sum may choose to pay it throughout the tax year for which it is due. They will then only pay the balance on 31 JAN following the tax year (i.e. 31 JAN 2026 for the tax year ended 5 APR 2025). Details of how this will be worked out are yet to be revealed by HMRC.

Are there any penalties associated with the new MTD ITSA rules ?

While the new system is rolled out, there will not be late filing penalties for at least one year. Nevertheless, penalties will apply for errors in the tax return or in the documents just as it has always been.

What else do you need to know about MTD ITSA ?

More information on MTD ITSA can be found on the HMRC website here.

You can find more information on how to sign up for MTD for ITSA here.

Accountants must ensure that suitable software is in place before they sign a client up for the MTD service. Now might be the ideal time to engage the services of an accountant to do all the work for you and provide you with all the tax advice you need.

 

by Laura Sterian

LAS Accounting Ltd

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