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

HMRC has a vision and ultimately that vision is to digitalise the tax system covering VAT, Income Tax and Corporation Tax.  With MTD VAT already in motion, HMRC’s next plan is to focus on MTD ITSA.

With currently over 4 million self-employed taxpayers and over 2 million landlords in the UK, MTD ITSA is likely to affect a large proportion of those individuals.  Delays in the implementation of MTD ITSA has resulted in the date for reporting under MTD ITSA rules being pushed back to April 2026 (April 2027 for partnerships).

MTD ITSA will affect self-employed/landlords who have income from self-employment or property (or both) which exceeds £50,000.  Meeting this criteria will in turn require the individual to be MTD ITSA compliant by April 2026.  The income limit is reduced to £30,000 the year after so if the qualifying income exceeds £30,000 but not £50,000 then it will be necessary to sign up to MTD ITSA from April 2027 instead (partnerships April 2028).  Anyone below these limits are not required to sign up to MTD ITSA but can do so voluntarily.

What counts as qualifying income?

Qualifying income is deemed as your turnover/rental income before deducting expenses and does not include income such as employment, dividends or savings.   You may have income from more than one source such as both self-employment and rental income so you should combine the turnover and rental income to calculate your combined qualifying income.  Individuals with foreign self-employment or properties will need to consider residency and domicile rules to determine the qualifying income.

What is MTD ITSA and if my qualifying income exceeds the limits how will that affect me?

MTD ITSA requires an individual to record their business transactions using digital records, with the most convenient method being online accounting software- a list of HMRC approved software providers is on the HMRC website to ensure compatibility.  HMRC requires MTD compatible reports to be submitted every 3 months (however you can do this more frequently if you wish)- the accounting software will generate figures based on the information you have entered to record your daily business activity and create an MTD ITSA report.  You will be able to submit the report using the online software and HMRC will provide an estimate for your tax liability.  The figures will be approximate figures as they will not include any year-end or tax adjustments.  Currently no tax payments are due after each quarterly submission. 

Online accounting software is not the only solution- it is possible to use spreadsheets however it will be necessary to use MTD ITSA compatible bridging software to ensure the figures are reported in the correct format and contain digital links to satisfy MTD compatibility.  Again a list of HMRC approved software providers are available on the HMRC website and includes those providing bridging software.

Once the 4 quarters have been completed and filed for the tax year, you will have until the 31^st January after the end of the tax year to complete and file your End of Period Statement (EOPS).  The EOPS will be the final figures for your self-employment/rental income and where you include any year end or tax adjustments.

Should you have both self employment and rental income to include then separate MTD ITSA submissions will be required and so you will need to manage two MTD ITSA software accounts.

Finally the last submission is your final declaration- this replaces the self-assessment tax return (which will still be available for those not affected by MTD ITSA) – here you declare any other reportable income or reliefs you normally declare on your self assessment return.  The final declaration is still required when there is no other income or reliefs to report.  The deadline for this is 31st January as usual for a self assessment return and this is when any tax will be due for payment to HMRC.

MTD ITSA is not for a while- what can I do now to make sure I am ready?

It’s so important to act now to avoid any last minute problems or delays.  Reading this article should be the start if you are not already familiar with MTD ITSA.  Early adoption of any changes to software will be key so you are comfortable with how to process and record the transactions in a timely manner.  Being able to practice now will ensure a successful transition when you need to start making your MTD ITSA submissions in the near future.

At Perrys Chartered Accountants we can provide bespoke advice and help you make these changes.  Please get in contact with your local Perrys office to discuss your MTD ITSA requirements or if you have any questions related to this article.