MAKING TAX DIGITAL FOR ITSA: WHAT WILL CHANGE?

Change of accounting year end

In preparation for the introduction of Making Tax Digital for Income Tax Self-Assessment, the basis period rules for unincorporated businesses are being abolished. In its place, unincorporated businesses will be assessed on the profits actually earned in the tax year.

The new rules take effect from 2024/25, with 2023/24 being a transitional year.

This will affect you if you run an unincorporated business (normally, if you are self-employed) and you currently prepare your accounts to a date other than one between 31 March and 5 April inclusive. This change could create additional tax liabilities in the tax year that this realignment takes place. HMRC have agreed that these additional liabilities can be spread over the course of five years.

The transition to quarterly tax returns

Individuals with significant income are presently required to file one tax return a year.

From April 2024, HMRC’s Making Tax Digital program is being expanded to include self-employed individuals and landlords with business or rental income in excess of £10,000. This is described as MTD for ITSA (Income Tax Self-Assessment)

From April 2025, all other individuals subject to self-assessment will be drawn into the MTD for ITSA net.

• MTD affected taxpayers will need to upload data to HMRC’s servers on a quarterly basis. This will increase the reporting requirement to four separate filing events during each tax year.
• In order to upload data, taxpayers will need to keep their records in a digital format that has been programmed to synchronise with HMRC’s server, e.g. Quickbooks or Xero

We would encourage all taxpayers who have not yet considered these changes to contact us as soon as possible. Although 2024 may seem to be some time away there is much to do to ensure you stay MTD compliant.

Self-employed sole traders, landlords and others who currently report taxable income of more than £10,000 a year via Self-Assessment (thought to number about 4.2m people) should be aware of and be preparing for a big change heading their way as a result of Making Tax Digital.

Making Tax Digital is a significant government initiative that will digitise the UK tax system for users and that process is already underway. VAT-registered businesses have already been affected by Making Tax Digital changes and Income Tax Self-Assessment taxpayers will be next.

Making Tax Digital is being introduced because the government wants to make it easier for people and businesses to manage their tax affairs more easily and efficiently, while helping to prevent basic tax errors that cost the UK many billions of pounds a year in lost tax revenue.

MAKING TAX DIGITAL FOR ITSA: WHAT WILL CHANGE?

The introduction of Making Tax Digital for Income Tax Self-Assessment (MTD for ITSA) will bring in new reporting requirements. The planned changes mean Income Tax Self-Assessment taxpayers won’t any longer be required to file a Self-Assessment tax return each year.

When MTD for ITSA is introduced, instead, you’ll need to maintain digital records of your income and expenses and send digital quarterly summaries to HMRC. To do this and so that you comply with MTD for ITSA requirements, you’ll need to use compatible third-party software. 

Based on the figures you send each quarter; you’ll get an estimate of how much tax you owe. Then at the end of the tax year, you’ll need to make an end of period statement (EOPS), confirming the figures you’ve submitted, with any accounting adjustments made (ie allowances, reliefs, etc). You’ll also need to submit your final declaration and HMRC will tell you how much tax you owe for that tax year.

You can apply for MTD for ITSA exemption if it’s not practical for you to use software to keep digital records or submit data to HMRC digitally, because of your age, disability, location (ie poor internet connection) or other justifiable reason (which can include religion). If your reason is accepted, HMRC will provide an alternative solution.

Need to know! If you currently keep financial records in paper form (unless you have a justifiable reason for exemption – see above), you’ll need to start using MTD-compliant software. Non-compliance may result in penalties. 

WHEN IS MTD FOR ITSA BEING INTRODUCED?

MTD for ITSA is being introduced on 6 April 2024, so you have until then to get the necessary software and sign up. In the meantime, if you want to get used to the new Making Tax Digital for ITSA recording and reporting requirements, you may be able to sign up now for MTD for ITSA.

You need to be a UK resident who is already registered for Self-Assessment. Your accounting period must align with the UK tax year (ie 6 April to 5 April), you must have submitted at least one Self-Assessment tax return previously and be already keeping digital records. Your tax records must be up to date, and you cannot have any outstanding tax bills.

MTD for ITSA changes will impact members of ordinary business partnerships with more than £10,000 a year of taxable income from 6 April 2025.

WHEN MUST YOU SEND MTD FOR ITSA DATA TO HMRC?

You’ll need to send a summary of your income and expenses online via your HMRC digital account at the end of each quarter. You’ll get up to a month after the end of each quarter to do this. The standard quarterly periods and deadlines in each UK tax year are:

According to HMRC, at a later date, MTD ITSA taxpayers “will be given the option to use calendar quarters”, although that means none of the above quarterly filing deadlines will change.

Need to know! As with the current system, late submissions, or payments under MTD for ITSA may result in penalty fines.

WHAT IS THE DEADLINE FOR PAYING MY MTD FOR ITSA TAX BILL?

You must pay your MTD for ITSA tax bill on or before 31 January in the following tax year. So, for the 2024/25 tax year, you must pay your tax bill on or before 31 January 2026.

Despite the introduction of MTD for ITSA, millions of taxpayers still need to budget effectively and perhaps put away some money each month from their income to ensure that they have enough money to pay their tax bill. Some things never change.

PDA Associate Partner, GoSimpleTax is award-winning software that offers you an easier way to complete and file your Self Assessment tax return. And to ensure that your tax return is error-free and that you’re claiming all of your allowable expenses, why not get your Self Assessment tax return checked by one of our experts?

Extra information can be found at the following two UK Government websites

https://www.gov.uk/government/news/businesses-get-more-time-to-prepare-for-digital-tax-changes

https://www.gov.uk/government/publications/extension-of-making-tax-digital-for-income-tax-self-assessment-to-businesses-and-landlords/extension-of-making-tax-digital-for-income-tax-self-assessment-to-businesses-and-landlords