Making tax digital for Income Tax: Small business guide

Making Tax Digital (MTD) is a significant government initiative whose main purpose is to make it easier for sole traders and businesses to deal with tax. Almost full digitalization of the UK tax system will be introduced. Sole traders and businesses will be using software and apps to keep records and report tax details to HMRC. It may prevent mistakes that are very expensive for the UK (almost £10bn a year in lost tax revenue).

Here is everything you should know about Making Tax Digital for Income Tax Self Assessment (MTD for ITSA).

What is MTD for Income Tax Self Assessment (ITSA)?

Making Tax Digital for Income Tax Self Assessment (MTD for ITSA) is a new and modern way for self-employed business owners and landlords to report earnings and pay Income Tax from April 2024.

Who does MTD for Income Tax Self Assessment (ITSA) apply to?

  1. Self-employed business owners and landlords with a total business and/or property income above £10,000 per year

  2. Partnerships with individuals as partners

Am I exempt from MTD for Income Tax Self Assessment (ITSA)?

You are exempt from MTD for ITSA if your qualifying income is £10,000 or less. If you still would like to sign up, you can do it voluntarily.

The below groups are not qualified to sign up for Making Tax Digital for Income Tax and do not need to follow the obligations:

  • trusts

  • estates

  • trustees of registered pension schemes

  • non-resident companies

When will MTD for Income Tax Self Assessment (ITSA) be introduced?

  1. 6th April 2024 for Self-employed business owners and landlords

  2. 6th April 2025 for general Partnerships with individuals as partners

What are the requirements of MTD for Income Tax Self Assessment (ITSA)?

Businesses, self-employed people and landlords will be required to:

  1. keep their records digitally (for ITSA purposes only)

  2. provide digital quarterly updates

  3. provide their ITSA return information to HMRC through MTD compatible software

What does keeping digital records mean?

Keeping digital records means you need to record all your business income and expenses digitally. It includes all your income from self-employment or property. Most of the accounting software offer to pull your bank transactions directly into software by setting up a bank feed and a wide range of tools to manage all of your invoices, expenses, projects and much more.

What is the MTD for Income Tax Self Assessment (ITSA) compliant software?

MTD for ITSA compliant software is the one that allows you to:

  1. maintain business records as set out in the regulations

  2. prepare and send quarterly updates and end of period statements using the information maintained in those records

  3. finalise your business income and submit your declaration after the end of the tax year

  4. communicate with HMRC digitally through our application programming interface (API) platform

An example of software that is fully compliant with the digital record keeping requirements for MTD for ITSA is XERO.

How do I sign up for MTD for Income Tax Self Assessment (ITSA)?

You can sign up through software that is consistent with Making Tax Digital for Income Tax. If you already use software, it is recommended to contact your provider about signing up. If you do not use the software yet, choose one from the list of recognised software available now and contact your provider about the sign-up process.

What do I need to sign up for MTD for Income Tax Self Assessment (ITSA)?

The information you need in order to sign up for MTD for ITSA:

  • business name

  • business start date or the date you started collecting property income

  • email address

  • National Insurance number

  • accounting periods

  • accounting types such as cash or standard accounting

Also, you must be registered to file Self Assessment tax returns. You’ll need the Government Gateway user ID and password you use to file returns. If you do not have a user ID, you can create it when you sign up.

What should I do after I sign up for the MTD for Income Tax Self Assessment (ITSA)?

  1. keep digital records of all your business income and expenses

  2. send quarterly updates to HMRC

  3. submit an end of the period statement when you finalise your business income and expenses for the tax year

  4. submit your final declaration and pay the tax you owe by 31 January of the following year

Make sure you send HMRC a Self Assessment tax return for the tax year before you signed up for Making Tax Digital for Income Tax.

MTD for Income Tax Self Assessment (ITSA): What are the quarterly updates?

Quarterly updates are the summaries that need to be sent to HMRC in due course. They include income and expenses for self-employment and property business. The information provided in the summary will give landlords and business owners a year-to-date calculation of how much tax they owe. The timing of the quarterly updates depends on the accounting period that the business is covered with. If it matches the tax year, the four updates need to be sent on:

  • 6th April to 5th July

  • 6th July to 5th October

  • 6th October to 5th January

  • 6th January to 5th April

What happens if I don’t comply with MTD for Income Tax Self Assessment (ITSA)?

If you fail to meet the obligations to provide returns and other information requested by HMRC on time, you will get a penalty. The automatic financial penalty will no longer be received by taxpayers. Instead, they will incur a certain number of points for missed obligations before a financial penalty is levied. An accumulation of points will incur a monetary charge. Also, existing penalties for error or late submission will apply.

Does MTD for Income Tax Self Assessment (ITSA) mean paying more taxes?

Even though there will be more reporting deadlines, it doesn’t mean you have to pay more tax. The new system is designed to eliminate tax reporting errors. If you made errors in your tax returns in the past and you corrected them, there is a possibility your tax bill might go up. The new system will correct your errors and you will pay exactly what you owe.

What are the benefits of MTD for Income Tax Self Assessment (ITSA)?

  1. Reduction of errors and confusion

    Costly errors may occur while submitting a single return once a year. It results from the fact that a small error at the beginning of the year leads to a big discrepancy over time. There are a lot of businesses that make mistakes accidentally. It results in billions of unpaid taxes every year.

  2. Hassle-free submissions

    As you will be submitting tax data every quarter, there will be no need to stress out and look for the missing receipts in a pile of papers by the end of the year.

  3. Real-time tax overview

    MTD for ITSA will allow you to have a real-time view of your tax obligation. It means there is no need to wait until the end of the year to find out the tax amount you need to pay. It will help business owners and landlords to set aside money for tax purposes.

  4. Paperless

    You will need to use the software to keep your records, update the HMRC and file your returns online. Going paperless prevents duplications, helps greatly with cleaning the clutter in your office and lets you protect the environment.

  5. Instant access

    Because of the requirement to use software, all of your information is stored in one place. It will let you access and view your tax data anytime and anywhere. Also, not only you will be able to log into your account through different electronic devices like smartphones, tablets or laptops, but also you will be able to edit the data.

Why should I start the digitisation process now?

In order to avoid admin overload and stressful situations, you should introduce a new accounting system as soon as possible. It will let you securely establish new working practices, and put you in the best position possible. If you already use cloud accounting software, you are ahead with digital record keeping. Now you just need to wait for the feature updates and the final declaration that is likely to arrive well in time. If your bookkeeping is done on spreadsheets, desktop software or paper, you are advised to make preparations earlier. You will have time to understand the accounting processes and be proficient with the software. The best you can do is to contact your Bookkeeper or Accountant.

If you would like to digitise your record-keeping ahead of the mandatory changeover date or discuss any of the above, please do not hesitate to contact me