Making Tax Digital for Income Tax (MTD ITSA) is coming.
The UK government’s initiative, Making Tax Digital (MTD), is transforming the way taxes are managed. Its aims are to simplify the process and reduce errors, although there is little evidence to support this. It was originally announced in 2015 (in March 2015, it was announced as ‘the death of the tax return’). So far, MTD has been aimed at two areas:
This was introduced in 2019. It requires any VAT registered business to keep their books digitally, and to submit their VAT returns securely through software.
This next phase is set to be rolled out over the next year. Here’s everything you need to know about when it starts and who will be affected.
When Does MTD for Income Tax Begin?
MTD for Income Tax will become mandatory in phases. The first group of taxpayers required to comply will need to do so starting 6 April 2026. This group includes individuals with an annual business or property income exceeding £50,000. A second phase will follow on 6 April 2027, targeting those with an annual income above £30,000.
Who Will Be Affected?
The initiative primarily impacts sole traders and landlords who are registered for Self Assessment. If your income from self-employment or property exceeds the thresholds mentioned above, you’ll need to transition to MTD ITSA. This means keeping digital records and using compatible software to submit quarterly updates to HMRC.
For those with income below £30,000, the government has indicated that MTD ITSA may apply in the future, but no specific timeline has been set yet.
The criteria for inclusion within MTD ITSA will be based on turnover/rental income on the 2025 tax return. HMRC will be writing to businesses and landlords potentially affected in April 2025, which will be based on turnover/rental income on the 2024 tax return.
There is very little information as to when the MTD regime will be applied to limited companies or partnerships (other than for VAT).
What Does This Mean for Taxpayers?
Under MTD ITSA, taxpayers will need to:
Specifically, under MTD for ITSA, the following information must be submitted:
Preparing for the Change
Many people in the accounting community are dismissive of the changes. It is still unclear as to how businesses will see any benefits. Any business which would benefit from using software would have done so already simply in terms of making their business easier to run. HMRC are asking for businesses to take part in their trial. However, we would advise our clients not to do so, as we believe it opens them up to late filing penalties if they do not file on time.
It is also not clear how HMRC will use the information.
We are aiming to contact clients directly who we feel will be targeted by HMRC. However, if you have any concerns about MTD ITSA and how it will affect you, please contact us.
N. Goddard
24.3.25
Here’s my story about how I was invited to the House of Lords to talk about Making Tax Digital for VAT.
The issue of Making Tax Digital (MTD) has been with us for a couple of years now. This is HM Revenue and Customs (HMRC) dictating how taxpayers should send information to them. It was originally any business income over £10,000 (including Buy to Let landlords and small sole traders), although in summer 2017 this was commuted to just VAT submissions (Making Tax Digital for VAT, MTDfV), with other taxes to follow.
The requirement to keep and submit VAT information electronically will be from 1st April 2019. We have been opposed to such a requirement, as it will undoubtedly create problems for clients. The principal issue is about choice. If you want to use software, you will do. That is the main reason behind your actions, not because HMRC say that you have to. We feel that the current course of action is unfair to smaller businesses.
Our recent blog covers the mechanics of MTDfV.
On 19th September 2018, we came across a request for information from the Economic Affairs Finance Bill sub-committee. They were calling for evidence in respect of Making Tax Digital for VAT and also HMRC’s powers. We put together a two page summary of our thoughts and sent it to them, hoping that it would help in some way to possibly postpone MTDfV. I then received an email on 10th October 2018 inviting me (and other accountants) to a private roundtable discussion in the House of Lords the following week. This was extremely interesting, and completely unexpected.
I was actually fortunate to see a similar meeting on Parliament TV between the various Lords and Baronesses and representatives of accountancy bodies beforehand, so was able to assess the strength of feelings.
Our meeting was scheduled for 4.05 pm and would last about an hour. It was 8 accountants being questioned by the following:
Lord Forsyth of Drumlean (Chairman)
The agenda in terms of pre-defined questions was as follows, although the actual discussions moved about quite frequently, depending upon who was speaking:
There was a split between the accountants who attended. Half were from larger practices and and half from smaller practices (like GBM Accounts) who represent the micro-business level. The results of the discussion was interesting. As accountants, we understand the benefits of keeping digital records, but also recognise that this approach is not for everyone. The Lords were pretty much united in believing that MTDfV would not benefit all businesses and that the costs of complying, supplied by HMRC, were insufficient. They were also interested to hear real life accounts of instances where HMRC had gone beyond what would be considered reasonable behaviour.
In time, the sub-committee will present their report to Parliament. Hopefully, their findings will contribute to helping small business deal with their tax burdens.
From 1st April 2019, if you have a VAT registered business with a taxable turnover above £85,000, HM Revenue and Customs (HMRC) are introducing some important changes which will affect you. They are introducing Making Tax Digital for VAT (MTDfV). These may have a significant effect on how you do your bookkeeping. From your first VAT period starting on or after 1st April 2019, you will be required to:
You will not be able to:
The VAT rules are not changing. VAT returns will still require the same information. The deadlines for sending VAT returns and making payments are staying the same. What is changing is HOW you keep the data and how it is supplied to HMRC.
The main business group which will be affected are those who have manual bookkeeping records. They will have to consider moving to either spreadsheets or use accounting software.
Businesses which already use accounting software need to ensure that it will be MTDfV compliant. This is a major change to the way in which VAT information is sent to HMRC: there is no guarantee that existing software will automatically do this.
HMRC say that they will allow a “soft landing period” of a year for businesses to fully comply with the new requirements.
If you are on the Flat Rate Scheme, there is good news! You do not need to keep a digital record of all of your purchases. The only exception relates to capital expenditure on goods on which input tax can be claimed.
If you are VAT registered but are below the £85,000 VAT threshold you do not have to make any changes at present. If you are close to the threshold you will have to keep an eye on your turnover. You will need to comply as soon as you exceed it. If your taxable turnover subsequently falls below the threshold you will still need to follow the MTDfV rules, unless you deregister from VAT.
The following records must be kept digitally:
Further information can be found in HMRC’s VAT notice 700/22.
If this seems vaguely familiar, it's because it was originally billed as '4 tax returns per year', and which we covered in October 2016. The Government diluted the requirements significantly in summer 2017 to apply in the first instance to VAT only. GBM Accounts are working hard on identifying clients who are affected to make sure that they will comply with the new regime. If you have any questions or concerns, please do not hesitate to ask.
In the 2015 Budget, HMRC announced the introduction of Making Tax Digital, an initiative to modernise the tax system. At the time, it was heralded at the ‘death of the tax return’. Since then, there has been little news in terms of how this will actually be achieved. However, HMRC have now published a number of consultation documents which seek to show how the initiative will develop.
We have paid particular attention to Bringing Business Tax into the Digital Age.
Summary
There are a number of key aspects of the Making Tax Digital consultation:
We have read the consultations and whilst we think that there are many benefits of processing and maintaining electronic accounting records, we also firmly believe that it is not for everyone. Over the years, we have strongly advised clients to keep their records in a manner that they are comfortable with. Many small businesses feel comfortable with keeping manual records (such as a hand written cash book). They are able to run their business, pay suppliers and salaries, and chase debts, without having to run an accounting system.
Also, we have handled the tax affairs of hundreds of small businesses over the years and have found that business owners don’t generally get surprises with their tax bills. They know that if their results have been good for the year, they can expect a higher tax bill. There will be a significant increase in the administrative burden if they have to report their income and expenditure on a quarterly basis, rather than annually, and we don’t think that small businesses will benefit from the extra administrative cost they will incur.
HMRC’s view that ALL accounting records should be stored electronically is also misguided. I attended a HMRC webinar on Making Tax Digital in early September 2016 and asked the question "Do ALL purchase invoices have to be kept digitally? And if so, what will that achieve?". HMRC's response was "Yes, all transactions will need to be recorded digitally in software (although updates will consist only of summary data, not every transaction that has occurred). The purpose of the digital record keeping requirement is to reduce the number of record keeping errors that currently need to be corrected later." This shows a lack of understanding as to how bookkeeping works. The implication is that (a) manual records are prone to mistakes, and (b) these mistakes can be eradicated by storing the prime documents electronically, which is absurd.
HMRC are at pains to dispel the concept that businesses will be required to submit 4 tax returns per year. The Foreword by Jane Ellison states “There will be no requirement to draw up a set of accounts each quarter. This reform does not mean ‘four tax returns a year’. In fact, it will eliminate the burdensome annual return and simplify tax for businesses”. However, the information submitted to HMRC will be details of income and expenditure (albeit in a simplified manner). This follows the same process for pulling together figures for a tax return.
HMRC also proposes the following:
Finally, the webinar I attended in early September was given by HMRC not only to accountants but also businesses. There was the ability to present questions, see the transcript below:
The consultation period runs until 7 November 2016. It's worth pointing out that it is exactly that, a consultation, but it can only be developed by input from various parties. We will be sending our comments from us, as accountants. However, we are sure that HMRC also need to hear from business owners. If you have any concerns about the viability of the changes, or comments in general about Making Tax Digital, then please send these to mailto:[email protected].
