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Making Tax Digital for Income Tax (MTD for ITSA)

January 27, 2024

In March 2015 Chancellor George Osborne made a bold statement by announcing the ‘death of the tax return'.  This led many people to assume that everything was in place and, indeed, the demise of the tax return would be occurring over the next few years.  In actual fact, following some reversals and deadline re-sets, the first mandatory filings using the replacement system will be from April 2026, some 11 years after the initial announcement and, even then, a huge slice of the tax return filing public will remain un-affected.  More people will be brought mandatorily into the system from April 2027, however, onwards from there, nothing has been defined, accordingly leaving George Osborne's statement un-resolved for the foreseeable future.  It will, however, be possible for people falling outside the mandatory rules to join the system voluntarily, if they wish to do so.

The original target was to bring the Self Employed and Landlords with annual gross income over £10,000 from these sources into the new system, however, this has been substantially ‘watered down’ in the short to medium term. Please bear in mind that 'gross income' is the annual receipt before any deductions, accordingly Landlords who receive income from letting agents will need to take into account the amount received by the agent (i.e. the amount paid by the tenant(s) over the course of the tax year). 

So, who will it mandatorily affect in the near future?

From April 2026, the Self-Employed and Landlords with an annual gross income (from these sources) over £50,000.

From April 2027, the Self-Employed and Landlords with an annual gross income (from these sources) between £30,000 and £50,000.

People deriving income from both self-employment and property letting will need to aggregate that gross income to determine whether they reach the mandatory thresholds.

Default exemptions from MTD for Income Tax, other than falling beneath the thresholds, include the absence of a UK National Insurance number (applicable to many non-resident foreign National Landlords) and also foster carer or shared lives carers, who's only income is qualifying care income.

Mandatorily included people will be able to apply for exemption from MTD if they are 'digitally excluded' – this includes unreliable broadband by virtue of living in remote areas, etc., or through disability.  Any such application will bypass the need to comply with MTD rules while the application is being considered by HMRC.

So, what’s involved with MTD?

The essential purpose of MTD is to ensure that applicable persons keep digital records of their business transactions, which are then crystallised by a number of filings over the course of the tax year in order to update HMRC.  The definition of keeping 'digital records’ is via entry of the transactions on to proprietary software, mobile phone ‘app’ or compatible spreadsheet system. 

The mandatory MTD for VAT that preceded the MTD for income tax spurred many software companies to provide a ‘free’ package to cater for a low level of transactions, no doubt in the hope of ‘capturing’ clients with a view to their anticipated future growth, however, these systems are generally ‘passive’, only offering the facility to enter figures under category, which are then concatenated into a filing via the system.  Accordingly, they simply replace the 'pen and paper’ entries made into a book, standard spreadsheet, or suchlike, by most people for subsequent addition and entry on to their tax return.  The drawback with these proprietary ‘client direct’ systems is that once transaction thresholds are exceeded, a monthly charge is usually levied which can be very expensive over the course of the year and very little, if any, general taxation advice is provided with the service.

HMRC are not producing their own software and, currently, the bulk of recommended software is for use by agents, which is the obvious answer to negotiating this potential minefield and receiving the necessary advice, alongside the information gathering necessary to make the filings.

Regardless of the method employed, if MTD ITSA is applicable to your circumstances, you will be required to submit cumulative quarterly updates to HMRC as follows:

  • 6 April to 5 July
  • 6 April to 5 October
  • 6 April to 5 January
  • 6 April to 5 April

(all to be submitted within one month of the quarter end)

You will then be required to submit a 'final declaration’, effectively replacing the self-assessment tax return, although it will, essentially, include the same information such as the final taxable profit for the business and any other taxable income received in the tax year.

The Solution

In consideration of the substantial increase in filings and associated calculations under the MTD system, if applicable to you, we recommend that you use the Taxeezy service for your MTD needs. This will leave you free to get on with your business, whether via self-employment, or property letting, or both, without having to worry about meeting the numerous deadlines and associated additional work involved. Taxeezy naturally carries forward it’s substantial long-term experience in the tax return industry to include helping clients with all the latest developments and this is done at very reasonable cost, certainly at less than you could be asked to pay using the passive software systems as aforementioned.

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