The government’s Making Tax Digital (MTD) programme is intended to move the UK towards a fully digital tax system, which is planned to allow taxpayers to easily keep digital records and report their tax liabilities and payments in real time.
It is the government’s intention that this will both reduce taxpayer errors and increase the information available to HM Revenue & Customs (HMRC).
From April 2024, therefore, individuals with business and rental income over £10,000 per annum will need to make quarterly reports under Making Tax Digital for income tax (now dubbed MTD ITSA). This will include many sole traders and landlords.
Some types of general partnerships with business and rental income over £10,000 per annum will be required to make quarterly reports under MTD ITSA from April 2025. Other types of partnerships, including Limited Partnerships, LLPs, and general partnerships with trust and corporate members, will join the MTD ITSA regime at a future date to be confirmed.
MTD ITSA will mean major changes for some taxpayers in how they keep their accounting records and file their annual returns. It is therefore a good time for affected businesses and landlords to take stock of their current position, and to establish what preparations they will need to make to be ready for the upcoming changes.
MTD ITSA timetable
- April 2021: Ongoing small-scale pilot of MTD ITSA.
- April 2022: Majority of businesses now eligible for MTD ITSA pilot.
- April 2023: Transition from current basis period regime to reporting profits arising in the tax year.
- April 2024: Individuals with annual business and rental income over £10,000 start reporting under the MTD ITSA rules.
- April 2025: Some types of general partnerships with annual business and rental income over £10,000 start reporting under the MTD ITSA rules.
Which businesses will fall within MTD ITSA?
The MTD ITSA legislation will apply to all businesses and landlords within the charge to income tax which have a turnover of more than £10,000, other than:
- Trusts and deceased estates.
- Partnerships with any partners which are not individuals (these have only been temporarily excluded from the regime, although no confirmed start date has yet been given).
- LPs and LLPs (again, this is a temporary exclusion).
Taxpayers who are digitally excluded will also qualify for exemption from the record-keeping and reporting requirements.
It is worth noting that the £10,000 threshold is a turnover, not a profit, threshold, and that where a taxpayer has more than one relevant source of income (for instance, an individual who has a trade and also a rental property) they are required to add the turnover from each of these sources together to determine whether or not the threshold has been breached.
Where a taxpayer falls into the MTD ITSA regime, they will need to keep digital records and submit quarterly reports to HMRC as well as complete a year-end reconciliation and update process which broadly equates to the current self-assessment tax return filing.
What are the digital record-keeping requirements?
Taxpayers will be able to keep their underlying records (receipts and invoices etc) in paper format if this best suits them (ie, there will be no requirement for all of a business’ underlying paperwork to be scanned and included in their digital records). However, the MTD ITSA legislation makes it clear that there will need to be an accompanying digital record for each transaction, with amounts allocated to the relevant income or expense category (broadly aligned to the current income and expense categories on the self-assessment tax return). It is the totals from these categories (but not the underlying transactional data) which will then be reported on a quarterly basis.
There is a limited exception from this transactional record-keeping requirement for retail businesses with a high volume of low-value transactions: these businesses will be able to elect to maintain a single digital record of each day’s gross retail sales instead of recording each sale separately.
HMRC’s aim is for taxpayers to record transactions in as near to real time as possible, to help increase record-keeping accuracy (and ultimately, to increase tax receipts). However, the only timing requirement in the draft legislation is that the digital records for each quarter are created before that quarter’s submission is made (or, where it is made late, by the time at which it should have been made). This will give businesses some degree of flexibility – it will, for instance, be possible to outsource the digitisation process if the taxpayer does not have the capacity (or does not want to) handle it themselves.
If you already use some form of accounting software to keep your business records, then you are already on the way to meeting the MTD ITSA requirements. You should, however, check to make sure that you are recording the right information and that your software can integrate with the software that your adviser is using for tax purposes. If you do not use software to keep records, then now is a good time to start to think about moving to digital record keeping. Moving to a cloud accounting system now will not only make sure that your records are MTD-ready, but could also make it quicker and easier to keep on top of your business finances, for example by pulling information direct from your bank account. There are various cloud systems available at a low monthly cost (in the region of £20 per month), which in our experience, can offer very good value for money when time saved is taken into account.
What are the quarterly reporting requirements?
Taxpayers will have to submit a summary of their income and expenses to HMRC quarterly. There will be no requirement to include accounting or tax adjustments in these quarterly figures, although a business can make these adjustments quarterly if it prefers to do so. Taxpayers will have one month from the end of each quarter to submit their quarterly update.
Significantly, where a taxpayer has more than one trade or property business (or a combination of trading and property income), it will need to keep records and return quarterly information separately for each. Taxpayers accustomed to making this type of adjustment as part of their post-year end processes will have to shift to a much more real-time allocation of their income and expenses.
Following the year-end, the taxpayers will have to submit an end of period statement that will incorporate relevant accounting and tax adjustments, and will finalise the business’ position for the year (again, with separate figures for each trade/property business). Taxpayers will have until the normal self-assessment deadline (ie 31 January following the tax year) to submit this statement, along with any other income and expenses that would currently be included in their self-assessment tax return. In practice, therefore, unless a taxpayer chooses to make accounting and tax adjustments quarterly, they may not notice a significant change in their year-end tax compliance process as a result of the changes.
When will I need to make my first quarterly report?
All individuals affected by MTD ITSA will come within the regime from 6 April 2024 and the report for their first quarter will be due by 5 August 2024. General partnerships affected will enter the regime on 6 April 2025 with the report for their first quarter due by 5 August 2025.
It should be noted that the government is also proposing changes to the basis period rules for unincorporated businesses ahead of the introduction of MTD ITSA. If enacted, this will mean that a business’ accounting date will not affect the MTD reporting requirements. More detail on the changes can be found in our briefing on basis period reform.
Partnerships will be required to keep digital records, and make quarterly reports in the same way as taxpayers. The end of period statement will, however, be replaced by a ‘Schedule A1 Partnership Return’. This will need to include all partnership income (not just trade or rental income) which falls to be taxed in the relevant year and will also need to show the allocation of income and expenses to the partners. There will be no requirement for the quarterly returns to include an allocation of amounts to individual partners (and partners will not need to make any quarterly reports in respect of their partnership income).
Seeing the opportunities
It is easy to look at the coming changes, with the increase in reporting points and the requirements for digital transmission, as a burden, and potentially something to put off preparing for until the final details are confirmed. But for many taxpayers, there are potential benefits in getting systems in place which support quarterly reporting when it is introduced. For example, moving to a cloud accounting system could give you the necessary digital records for tax purposes, and make it easy to transfer information to your agent or HMRC digitally when the new rules come in.
A range of add-on services are also available for some accounting packages, offering options such as scanning and uploading business receipts (to reduce the need for manual data entry), cashflow management tools and business forecasting and analysis packages that can help you to understand how your business is performing in its marketplace. Quality data can allow you to plan better in areas such as capital expenditure, profit extraction and overall growth, as well as tax. If you don’t already use an accounting system, or haven’t considered alternatives for a while, now could be a good time to take a look around and see whether you could benefit from a move.
We can advise you on selecting an appropriate accounting package and using it to maximise the benefits, as well as preparing more generally for the MTD changes.
If you have any questions on MTD ITSA, please get in touch with your usual Saffery Champness contact or speak to Alison Hobbs.