Essentials: Making Tax Digital for income tax

Despite a one-year delay to implementation, it is important to start preparing for Making Tax Digital for income tax self-assessment (MTD for ITSA) now that regulations have been made legislating the start date and implementing the rules

The basic requirements of Making Tax Digital for income tax self-assessment (MTD for ITSA) have been known for some time. These provide that unincorporated businesses, the self-employed and landlords (with turnover over £10,000) will be required to:

• keep income and expense records digitally;

• use MTD compatible software to submit digital quarterly updates and end of period statements; and

• submit a final declaration for each tax year.

However, it is only now that the required secondary legislation has been laid before the House of Commons on 23 September that we know when the rules will come into force and the detailed requirements.

Start date

The introduction of MTD for ITSA has been pushed back several times, most recently in recognition of stakeholder feedback and the challenges faced by businesses and their representatives because of the pandemic. The headline date is that MTD for ITSA will apply a year later than expected, in the tax year beginning in April 2024. But that is not the full picture.

The MTD for ITSA provisions are to apply for a business being carried on immediately before 6 April 2023 for persons, excluding partnerships, from 6 April 2024.

Based on a government announcement MTD for ITSA is to apply for general partnerships from 6 April 2025 and for other partnerships (such as limited liability partnerships and those with corporate partners) from a date yet to be set.

Where someone starts a business on or after 6 April 2023 and is required to complete a personal tax return including information about that business, the MTD for ITSA provisions apply:

• where a notice to file is given for Year 1 after 31 October in Year 2, from 6 April in Year 4, where Year 1 is the year of assessment to which the return relates; and

• in any other case, from 6 April in Year 3, where Year 1 is the year of assessment to which the return relates.

Example

Lucy starts a business in 2023–24 and on 6 April 2024 HMRC issue her with a notice to file in respect of 2023–24.

Lucy will be required to use MTD for ITSA from 6 April 2025.

If instead HMRC issued the notice to file on 31 December 2024 (ie, after 31 October in year 2) Lucy will only be required to use MTD for ITSA from 6 April 2026.As you can see the start dates are 6 April in the relevant year, regardless of the person’s accounting date (and we do not yet know whether the proposed basis period reforms will go ahead).

Exemptions

The primary legislation provides an exemption for trustees of charitable trusts, trustees of exempt unauthorised unit trusts, the underwriting businesses of Lloyds members, distributions to shareholders in real estate investment trusts and participants in open-ended investment companies.

The secondary legislation provides details on exemptions for:

• the digitally excluded;

• those who meet one of the two income exemptions;

• non-resident companies;

• trustees (including executors or administrators of estates); and

• the foreign business income of a person who is not domiciled in the UK.

Under the exemption for the digitally excluded, a person or partnership will be exempt if:

• the person or each of the partners have a religious objection to the use of electronic communication; or

• it is not ‘reasonably practicable’ for the person or partner to use electronic communications or to keep electronic records due to age, disability, location or any other reason;

• the person gives notice to HMRC that they are digitally excluded and explains why; and

• HMRC confirm they are satisfied that the person is digitally excluded.

HMRC’s guidance says that if they have already confirmed that a person is exempt from MTD for VAT, then they will not need to apply for an exemption for MTD for ITSA.

Income exemption

A person or partnership will be exempt from using MTD for ITSA for a tax year if:

• they were not required to use MTD for ITSA in respect of the previous tax year; and

• the amount of the person’s qualifying income for the most recent tax year in relation to which the self-assessment filing deadline fell before the start of the tax year is not more than £10,000.

A person’s qualifying income for a tax year is the total income, before any deductions, which, for each business carried on by the person in that tax year, are included in that person’s tax return for that tax year.

Example

Brad had qualifying income of £8,000 in 2022–23, £12,000 in 2023–24 and £14,000 in 2024–25.

Brad will not be required to use MTD for ITSA in 2024–25 because he did not have to use MTD for ITSA in respect of 2023–24 and the most recent filing deadline before the start of 2024–25 was for 2022–23 in which his income was not more than £10,000.

Brad will be required to use MTD for ITSA in 2025–26, because although he did not have to use MTD for ITSA in respect of 2024–25, the most recent filing deadline before the start of 2025–26 was for 2023–24 in which his income was more than £10,000.

Income exemption for a person required to use MTD for ITSA for three tax years

A person or partnership will be exempt from using MTD for ITSA for a tax year if:

• the person was required to use MTD for ITSA in respect of each of the three previous tax years; and

• the person’s qualifying income for each of those three tax years was not more than £10,000.

A person’s qualifying income for a tax year is:

• the total income, before any deductions, which, for each business carried on by the person in that tax year, are included in that person’s tax return for that tax year; or

• where the tax year has ended but the filing deadline for the tax year has not passed, so much of the amounts of income, before any deductions, as are included in the quarterly updates for that tax year for each business carried on by the person.

Records

In addition to existing record keeping requirements, a person required to use MTD for ITSA must keep digital records for each business.

The digital records must be recorded by the earlier of:

• the quarterly deadline for the quarterly period in which the digital record falls; or

• immediately before the person provides the quarterly update for the quarterly period in which the digital record falls.

Retailers can elect instead to retain the digital records specified in a ‘retail sales notice’ in respect of their retail sales, where such a notice has been made by HMRC.

Quarterly Updates

The basic requirement is that a person must provide updates as follows:

But a person can instead elect to use calendar quarters in which case the updates are required as follows:

Final declaration

The final declaration replaces the self-assessment tax return. In it a person will tell HMRC about any personal income and submit claims for reliefs.

Final declarations are to be submitted by 31 January after the end of the tax year.

Conclusion

Now that the start date for the first wave of MTD for ITSA and the detailed rules have been legislated, taxpayers, their advisers and software providers have the certainty needed to plan for these significant changes.

However, HMRC still have a great deal of work to do to ensure that taxpayers are ready for the change. And if the proposed basis period reforms go ahead, with 2023–24 being a possible transitional year the impact on the work of advisers, on whom HMRC will rely for the smooth rollout of MTD for ITSA, should not be underestimated.

Meg Wilson, tax writer at Croner-i

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