Key facts and MTD for ITSA terms you should understand

If you’re self-employed or a private landlord who reports taxable income of more than £10,000 a year via Self Assessment and you don’t already know it, a major change is on the horizon and it’s one…

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Last Updated: 6th September 2022   |   Created: 10th August 2022

If you’re self-employed or a private landlord who reports taxable income of more than £10,000 a year via Self Assessment and you don’t already know it, a major change is on the horizon and it’s one that you need to prepare for.

It goes by the name of Making Tax Digital (MTD) and it’s a major digital government initiative that has already started to transform the UK tax system. All VAT-registered businesses must now keep digital VAT records and send VAT returns to HMRC using MTD-compatible software (or “bridging software” that enables them to use their existing record-keeping software).

Making Tax Digital is being introduced because the government believes it will make it easier for people and businesses to manage their tax affairs more efficiently, while preventing basic tax errors that cost the UK many billions of pounds a year in lost tax revenue.

When will MTD for ITSA be introduced?

Making Tax Digital for Income Tax Self Assessment (MTD for ITSA) is being introduced from 6 April 2024, and it will usher in a new way of reporting your taxable income to HMRC. Members of ordinary business partnerships will need to comply with Making Tax Digital recording and reporting requirements from 6 April 2025.

You still have plenty of time to learn what you need to know about MTD for ITSA and get the necessary software, so you can start recording tax data and reporting it to HMRC as required. In fact, if you have the required MTD-compatible software, you may be able to sign up now for Making Tax Digital for ITSA.

You must be a UK resident who is already registered for Self Assessment and your returns and payments must be up to date. Your accounting period must also align with the tax year (ie 6 April to 5 April). Sole traders with income from one business only or a private landlord who only get income from renting out UK property can sign up. You cannot yet sign up if you need to report income from multiple sources.

Need to know! You can apply for a MTD for ITSA exemption if it’s not practical for you to use software to keep digital records or submit them to HMRC digitally. This could be because of your age, disability, location (ie poor broadband connection) or another justifiable reason. You’ll need to explain your reasons to HMRC and an alternative solution will be arranged.

How will things change under MTD for ITSA?

  1. You’ll need to regularly maintain digital records of your income and allowable expenses. These must be up to date before the end of each quarter.
  2. You’ll need to send a quarterly summary of your business income and expenses to HMRC using MTD-compatible software. You’ll get up to a month after the end of each quarter to do this.
  3. You’ll get an estimated calculation of how much tax you owe, based on the figures you’ve supplied, which could help to you to set aside enough money for paying your annual tax bill.
  4. At the end of the year, you’ll need to confirm the figures you’ve submitted via an EOPS (see below), with any accounting adjustments made (ie allowances, reliefs, etc). You’ll also need to submit a final declaration (see below) and HMRC will tell you how much tax you owe.
  5. You must pay your MTD for ITSA tax bill on or before 31 January in the following tax year. So, for example, for the 2024/25 tax year, you must pay your tax bill on or before 31 January 2026.
    Need to know! As with the current Self Assessment system, late submissions or payments under MTD for ITSA may result in penalties.

Key MTD for ITSA terms

Annual summary

Summary of data for a tax year detailing categorised allowances and adjustments.

EOPS (end of period statement)

At the end of the tax year you must finalise your income and expenses. Under MTD, you do this by submitting an end of period statement for each income source, if you earn income from more than one. Any accounting adjustments (ie any reliefs or allowances claimed) will also be made at this point. Your MTD-compatible software will produce these statements for you, but only when the accounting period has ended.

Final declaration

At the end of the tax year, you’ll also need to submit a final declaration, confirming that the updates you’ve provided are accurate. You won’t be able to make your final declaration if your EPOS hasn’t been completed. The final declaration is the MTD equivalent of the Self Assessment tax return. This is where you confirm details of other taxable income received during the tax year, for example, from employment, pensions, savings, etc.

Obligations

A set of date periods for which you must provide summary income and expense data. Each obligation has a start and end date, which define the obligation period. For MTD, each business has multiple obligations (one every quarter) based on its accounting period.

Update period

Period of time within an obligation during which you can submit summarised income and expense data. It might be a single day or the whole obligation period. Data can be provided as a single update covering the whole period or as several smaller updates.

MTD-compatible software

Software that can integrate with HMRC systems, enabling you to send MTD updates to HMRC each quarter and at the end of the tax year, as required. Some may choose to use bridging software, which enables them to continue using their existing record-keeping software, while fulfilling MTD for ITSA filing requirements.

Summary updates

The MTD-compatible software will generate summary updates of your business/rental income and expenses, which will be sent to HMRC online every quarter. These will provide an estimate of how much tax you owe, based on the information you’ve provided to HMRC.

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Blog content is for information purposes and over time may become outdated, although we do strive to keep it current. It's written to help you understand your Tax's and is not to be relied upon as professional accounting, tax and legal advice due to differences in everyone's circumstances. For additional help please contact our support team or HMRC.

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