Making Tax Digital for Income Tax (MTD ITSA)

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:

1. Making Tax Digital for VAT (MTD VAT)

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.

• Making Tax Digital for Income Tax Self Assessment (MTD ITSA)

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:

• Maintain digital records of their income and expenses.
• Submit quarterly updates to HMRC using MTD-compatible software.
• File an end-of-year declaration to confirm the accuracy of the submitted data.

Specifically, under MTD for ITSA, the following information must be submitted:

1. Quarterly Updates:
   • Income and expenses for each quarter, categorized appropriately (e.g., rent, utilities, etc.).
   • The updates will provide HMRC with an estimate of tax owed during the year.
2. End of Period Statement (EOPS):
   • Submitted once a year to confirm the accuracy of the quarterly updates.
   • Includes final adjustments such as reliefs, allowances, or claims related to the reported income and expenses.
3. Final Declaration:
   • Essentially replacing the traditional Self-Assessment Tax Return.
   • Allows taxpayers to declare all sources of taxable income, including items not covered by quarterly updates (e.g., savings interest).

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