Making Tax Digital for Income Tax

Making Tax Digital (MTD) is a UK government initiative aimed at modernising the tax system to make it easier for individuals and businesses to get their taxes right. In the first instance, MTD was rolled out for VAT registered businesses and individuals, and this has been fully operational now for a couple of years. 

The next stage of MTD will cover Income Tax Self-Assessment (MTD ITSA) which will mean many property landlords and self-employed individuals will have to keep digital records for their businesses and rental properties.

The digital records maintained will form the basis of a submission to HMRC on a quarterly basis. Following the four quarterly submissions, an annual digital tax return will need to be filed which is like the current Self-Assessment tax return but there will be some differences. For example, some tax data on the final tax return will be automatically populated as HMRC’s modernised system will allow them to source data from external sources. 

MTD ITSA will not change the dates when tax needs to be paid, nor will it change when the final tax return requires submitting.

Who will be affected?

MTD ITSA is being introduced for self-employed individuals and landlords with gross “qualifying income” of more than £20,000 where qualifying income is the total gross income from all sources of self-employment and property income before the deduction of any expenses. For sources of income which are jointly held, e.g. a rental property; it is only the individual’s share of income that should be included.

When will you be affected?

MTD ITSA is being rolled out in three stages: 

If you are affected, what do you need to do?

You will need to keep digital records, file quarterly updates, and complete an end of year declaration. 

Digital record keeping

For individuals caught by MTD ITSA, individuals will need to keep a digital record of the amount, category and date of income and/or expense relating to their sole trade business and/or property business. These records can be maintained using ‘off the shelf’ accounting software or HMRC will allow records to be maintained on spreadsheets.

From these digital records, taxpayers will be required to file a quarterly update with HMRC and then, at the end of the tax year, an end of year declaration will need to be made which is more akin to the self-assessment tax return which is filed now.  

So, what next?

It should be clear to see that if you are caught by MTD ITSA, then change may be required and potentially those changes may be significant and therefore much more work may be required. In addition, it is estimated that about 780,000 individuals will be caught by MTD ITSA stage one and a further 970,000 by stage two; it is not yet certain how many will be affected by stage three as this was only announced in the Chancellor’s Spring Statement. 

Quite simply, our advice is to act early because with that many individuals looking for Accountants to guide them through the process, and register them with HMRC for example, it has got to make sense to act sooner rather than later. We believe there are two things that you must do:

Stay informed – keep up to date with HMRC’s guidance and any changes which HMRC may make, and

Read our more detailed article – a more detailed version of this article can be found here, we recommend you read it if you think that you will be caught by MTD ITSA.

Talk to your Accountant – speak with your advisor early. Consider if there are changes which you can make which mean you would not be caught by MTD ITSA and if you are caught, discuss how you can best work together to make the whole process as smooth and efficient as possible.

For a printable version of our more detailed article, please click here.

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