Making Tax Digital (MTD) for income tax self-assessment (ITSA) is likely to impact many of your clients. As accountants, we need to start preparing now. There are practical steps you can take to ensure the transition to MTD for ITSA is as smooth as possible.
The MTD story so far
Since 2019, the vast majority of VAT-registered businesses with a taxable turnover above the VAT threshold (£85,000) have used MTD-compatible software. These arrangements were extended to all VAT-registered businesses from April 2022. All accountants are now familiar with HMRC’s arrangements to receive information about your clients’ VAT returns digitally each quarter.
From April 2024, MTD will be extended to certain types of taxpayers. To avoid surprises in the future, you should keep all of your clients updated on MTD developments.
HMRC is constantly updating guidance on its website – it is strongly recommended you sign up for HMRC bulletins and check the GOV.UK website regularly.
Initor Global will be running regular webinars to keep you up to date.
Which taxpayers does MTD for ITSA affect?
From 6 April 2024, businesses with self-employed people (ie. sole traders) and landlords will need to follow HMRC’s rules for MTD for ITSA. This means affected taxpayers must:
- operate MTD in relation to their trading and property income which is chargeable to income tax and Class 4 NICs if their gross income from these sources for a tax year exceeds £10,000
- keep their records digitally (for MTD purposes only), by providing digital quarterly updates and providing their ITSA return information to HMRC through MTD-compatible software.
It is worth noting the £10,000 threshold relates to total turnover and not profit (or loss). Where a taxpayer has multiple sources of income covered by MTD for ITSA, such as a sole trader with income from a rental property, it’s the combined amount of income from all relevant sources which determines whether MTD for ITSA must apply.
Business owners and landlords will no longer file an annual self-assessment tax return, unless they are completely exempt from MTD for ITSA.
Where a taxpayer falls into the MTD ITSA regime, they will need to use MTD-compatible software to:
- keep digital records and submit quarterly reports to HMRC (‘business updates’)
- complete a year-end reconciliation (an end-of-period statement similar to a set of accounts) and send it to HMRC each year
- Complete a final submission and update process which will follow the current self-assessment tax return filing arrangements with HMRC.
HMRC, therefore, expects a total of six submissions to be made for each tax year by affected taxpayers. In turn, there are potentially six different contact points between accountants and their clients throughout the year to ensure clients’ tax affairs are up to date. Accountants will need to consider how they manage these arrangements in terms of their own capacity to serve clients and any impact on their fees. There are clear incentives for accountants to empower clients, through the right software and services, to automate the submission processes as far as possible.
The timing of the quarterly updates and deadline for submission of digital records to HMRC is determined by the beginning of the tax year:
| Quarterly period | Deadline for submitting digital records to HMRC |
| 6 April to 5 July | 5 August |
| 6 July to 5 October | 5 November |
| 6 October to 5 January | 5 February |
| 6 January to 5 April | 5 May |
| End of period statement for each source of income | 31 January of the following tax year (same as self-assessment) |
| Final declaration | 31 January of the following tax year (same as self-assessment) |
Partnerships with individuals as partners will have to follow the rules from 6 April 2025. HMRC has said that limited liability partnerships (LLPs) and partnerships with corporate partners will be required to be covered by MTD for ITSA at a future date to be confirmed.
How HMRC expects you to meet MTD for ITSA requirements
Individuals (or their accountants) will need to use software that works with MTD for ITSA. The software must enable the following:
- create and store digital records of each of business transaction
- send updates of the totals of business income and expenses every three months
- confirm the end of period statements.
You will also need to make a final declaration by 31 January following the end of each tax year. This will be possible either through the compatible software or your client’s HMRC online services account.
If a client has more than one business (for example, if they are a landlord and a sole trader), the MTD for ITSA requirements must be met for each business. This means you must keep separate records and make separate submissions for each business.
If a client receives property income from multiple properties, all properties that are:
- in the UK are treated as one ‘UK property business’
- outside of the UK are treated as one ‘overseas property business’.
Practical steps accountants can take now
As accountants enter the annual season for preparing self-assessment tax returns for the 2021/22 tax year, now is the ideal opportunity to prepare your Practice and your clients for MTD for ITSA. The following table provides examples of actions you can take over the coming months.
| Action | Implementation |
| Segment your client database and keep it up to date. | Update your client database to include all client activities, identify those caught by MTD for ITSA and those who may be caught by April 2024 through changing circumstances, such as the purchase of rental properties |
| Record the software (if any) your clients are using – ensure it is HMRC compatible. | |
| Record how your clients keep records – especially landlords who may see this as a once a year process. Encourage the use of a business bank account with a bankfeed to keep software updated regularly. | |
| Review your own client management and billing systems to manage the transition to MTD for ITSA – you will require new engagement letters to cover MTD for ITSAA with updated fee changes depending on your level of involvement. | |
| Contact clients affected by MTD for ITSA to understand their software and service needs | Put in place effective communication channels. Update your internal processes to contact your clients throughout the tax year to ensure they are clear on their responsibilities. |
| Explain how your services are changing and any impact on fees and engagement terms, well in advance of April 2024. Consider a change in your fee arrangements to monthly billing to soften the impact of any increase. |
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| Encourage clients to start maintaining digital records now rather than wait until 2024 – use the 2022/23 tax year as a dry run. | |
| Identify the scope to provide other services such as bookkeeping or other ongoing support such as management information and tax planning. This may be an opportunity to outsource large parts of the routine work needed to keep digital records up to date. |
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| Prepare a delivery plan for your Practice | Evaluate your capacity to deliver and scale up your services. Workflows will need to be updated, with outsourcing as an option for bookkeeping and provision of regular management information for clients to help meet deadlines. |
| Build on existing monthly arrangements for maintaining client records such as monthly bank reconciliations and associated bookkeeping. | |
| Test your end to end workflows with a willing client | Identify a small number of clients who are making a major transition to digital bookkeeping to work with you to test your processes. Encourage feedback – positive and negative to learn lessons and improve processes. |
| In the lead up to 6 April 2024 | Where required to do so, clients will need to submit a self-assessment tax return for the 2022/23 tax year by the HMRC deadline of 31 January 2024. HMRC will review the 2022/23 return and check if qualifying income is more than £10,000. |
| If the qualifying income threshold is met, HMRC will write to your client and confirm they must meet the MTD for ITSA requirements by 6 April 2024. If you are the client’s agent, you can meet the requirements on your client’s behalf. | |
| Clients, or you as your client’s agent, must use software that’s compatible with MTD for ITSA and authorise it. | |
| Your client, or you as your client’s agent, must sign up for MTD for ITSA. | |
| Check your clients qualifying income for MTD for ITSA | Review the combined income your client receives in a tax year from self-employment and property income sources. HMRC will assess this before qualifying expenses are deducted. |
| Check all other sources of your client’s income usually reported through self-assessment, such as income from employment, dividends, or savings – these do not count towards a client’s qualifying income. These other income sources will be reported using either of the: – Making Tax Digital compatible software (if it has the functionality) – client’s HMRC online services account |
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| Check your client’s accounting period – if it’s longer or shorter than 12 months, and HMRC has the necessary data, HMRC will annualise the qualifying income. For example, if a client has become self-employed, but has only been trading for six months in the first tax year, then HMRC will double the income reported to calculate the qualifying income. |
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