How will making Tax Digital for Income Tax – MTD ITSA – affect your business?

HMRC has made its intentions clear. Its stated ambition is to become one of the most digitally advanced tax administrations in the world, transforming the system to make it more effective, efficient and make it easier for tax payers to get their tax right. HMRC calls this process “Making Tax Digital” or MTD.

MTD for VAT is already with us. The next phase of HMRC’s mandate focusses on income tax. MTD ITSA will require self-employed businesses and landlords with annual business or property income above £10,000 to comply with its new regulations from April 2023. Essentially, digital records, quarterly returns submitted to HMRC with details of income and expenditure and end of period statements will be required.

Stuart Hulland, Partner at Bates Weston, has been taking a closer look at MTD for ITSA. He makes the following points:

  • HMRC has indicated that it expects to change the basis period for reporting tax on self-employed profits from the accounting period to the tax year. It adds that accounting periods ending on 31 March will be treated as ending on 5 April for tax purposes. This means that unincorporated businesses will need to enter the MTD ITSA regime from the next accounting period starting on or after 1 April 2023. Those that draw up accounts to 31 March 2023 will therefore join MTD ITSA from 1 April 2023 not 1 April 2024 as was initially expected.
  • Filing deadlines will be quarterly, 5 August, 5 November, 5 February and 5 May. Each quarterly submission will contain total sales income in the period and expenses totals by categories. Quarterly balance sheet statements will not be required. Any accounting adjustments will be made on a final submission for the year known as the End Of Period Statement or EOPS. This must be submitted by 31 January following the tax year end, and once submitted a finalisation statement will calculate the tax liability.
  • It is important to recognise that the turnover threshold of £10,000 takes into account income from all businesses, trades and property and all unincorporated businesses with an annual turnover exceeding £10,000 will be required to report income and expenses under MTD ITSA.
  • Partnerships which include a corporate partner, Limited Liability Partnerships and Limited Partnerships can expect their start date to be deferred. All partnerships which only have individuals as partners will be required to join MTD ITSA from April 2023.
  • Trusts, Estates, Trustees of registered pension schemes and non-resident companies are expected to be exempt from MTD ITSA, and it is likely that the “digitally excluded” will also receive an exemption.

Stuart stresses that these points are drawn from HMRC’s draft legislation and consultation documents and that the final regulations for MTD ITSA are expected in Autumn 2021. We will be keeping a close eye on developments.

In the meantime, if you would like to speak to us about preparing for digital record keeping, please do get in touch.