Making Tax Digital – Income Tax

This Content Was Last Updated on November 23, 2023 by Jessica Garbett

 

Making Tax Digital for Income Tax Self Assessment (MTD ITSA) comes into effect for Sole Traders, Partnerships and Landlords from April 2026 (more detail below)

Making Tax Digital for Income Tax (MTD ITSA) is part of HMRCs overall Making Tax Digital programme:

  • Making Tax Digital for VAT – from April 2019
  • Making Tax Digital for Income Tax – from April 2026
  • Making Tax Digital for Corporation Tax – date as yet unspecified

Please be aware that the details around MTD ITSA are still emerging, both as regards HMRC regulations and guidance, and their practical implications. This guide sets out our understanding as of March 2023, but there are still uncertainties, and aspects will change over coming months. We plan to update this page when major changes come through, so check back regularly.

In the Autumn Statement of 22nd November 2023, some tweaks were proposed to MTD ITSA:

  • Quarterly reporting to remain but now to be cumulative rather than standalone for each quarter – this should make correcting errors easier
  • EPOS to be abolished – quite where adjustments for end of year items now go isn’t clear, maybe just on the crystallisation statement
  • Commitment to allow three line quarterly reporting – income, expense and profit – for businesses with turnover below the VAT threshold
  • These changes are not reflected in the content below – we will reflect them in the next major update.

 

Content

 


Summary – What Changes Will MTD ITSA Bring in? Who Does It Apply To?

MTD ITSA comes in from April 2026 for:

  • Sole Traders and Partnerships
  • Landlords

This is a deferral from April 2024 as originally planned.  The new staging is:

  • From April 2026 Sole traders and partnerships with turnover of £50,000 or more
  • From April 2027 Sole traders and partnerships with turnover of £30,000 or more
  • Position for Landlords and businesses with turnover below £30,000 being reviewed (last update on this, December 2022, and nothing further expected for some time – probably one to two years)

The key obligations brought in by MTD ITSA are to:

  • Keep Digital Records
  • Submit Quarterly Interim Returns to HMRC digitally one month after quarter end
  • Submit final returns to HMRC by 31 January after the end of the tax year

 


More Detail – Who Does MDT ITSA Apply To?

As mentioned above, MTD ITSA applies to:

  • Sole Traders
  • Partnerships – The obligation to join MTD ITSA applies to ordinary Partnerships only, not LLPs
  • Landlords, subject to review

Originally, there was to be a £10,000 threshold,  This has now increased to £50,000 reducing to £30,000.  We await more detail on application of this, however the expectation is is:

  • In the case of Partnerships the threshold is per Partnership, not per Partner
  • For individuals the threshold is tested against the aggregate of:
    1. Turnover from all businesses they own as a sole trader
    2. Rental income as a landlord
    3. Their share of the rental income from properties owned jointly

 


When will MTD ITSA Apply From?

Although the MTD ITSA regime starts from April 2026, the requirement to join the scheme is triggered by previous years Self Assessments.

We expect the first wave of MTD ITSA, April 2026, will be based on 2024/25 Self Assessment returns, which are due to be filed by 31 January 2025.  We would then expect the 2025/6 Self Assessment to determine mandation for the second wave in April 2027.   This is based on the original guidance for April 2024 commencement, before the deferral – it may change again.

For taxpayers in receipt or business income or rental income over the threshold for the first time, we would expect the requirement to enter MTD ITSA comes 12 months after the Self Assessment breaches the £30,000 threshold.

 


More Detail – Submitting Returns

Each trading or property business must submit five returns, being:

  • Four quarterly returns, at the end of the next month – HMRC refer to these as “Income and Expense Updates”.
    • The intention is these are automated from your software.
    • These returns do not need to be as detailed as a Self Assessment.
    • You will be able to see an updated tax calculation for the year at this stage, although payment timescales are not being changed.
    • These returns are up to 5 July, 5 October, 5 January and 5 April, but tax payers can elect to report to 31 March, 30 June, 30 September and 31 December; no other pattern will be allowed.
  • If the business is VAT registered then these returns are in addition to the regular VAT returns, now under MTD for VAT, which remain separate.
  • A Business Income End of Period Statement (“EOPS”) by 31 January after the end of the tax year.
    • The EOPS is broadly equivalent to the Trading (SA103) or Property Income (SA105) Supplements that are supplied as part of Self Assessment currently.
    • The EOPS is where annual adjustments are made, eg stock, debtors/creditors, Capital Allowances, Private use.
  • The five return (4 quarterly and EOPS) obligation applies to each business, not per individual. So if an individual has both a trading business and a property business, there will be a separate return cycle and EOPS for each of these (so 10 returns).

The individual then has to submit a Final Return called a Crystallisation:

  • Crystallisation return by 31 January after the end of the tax year
  • Contains miscellaneous income detail, eg savings and investments, income from employments, deductions like Gift Aid and pensions
  • Contains a declaration of completeness for the tax year
  • Broadly equivalent to the main Self Assessment return

Taking a simple case of a Sole Trader under MTD ITSA, their obligations change as follows:

  • Currently – annual Self Assessment by 31 January after tax year end
  • Under MTD ITSA
    • Four quarterly returns, one month after quarter end
    • Annual EOPS by 31 January
    • Annual Crystallisation by 31 January
    • Total 6 returns

Taking a more complex case of a Sole Trader who also owns a rental property, their obligations change as follows:

  • Currently – annual Self Assessment by 31 January after tax year end
  • Under MTD ITSA
    • Four quarterly returns, one month after quarter end for trading business
    • Four quarterly returns, one month after quarter end for property business
    • Annual EOPS by 31 January for both trading and property business
    • Annual Crystallisation by 31 January
    • Total 11 returns
    • See the section below, “More Detail – Multiple Income Streams”

 


More Detail – Multiple Income Streams

Many taxpayers will simply have Self Employment or Rental Income. However where there are more complex revenue streams, HMRC will expect separate returns for each revenue stream under the following headings:

  1. Businesses / Self Employments
  2. UK property income other than UK/EEA Furnished Holiday Lettings
  3. Overseas property income other than EEA Furnished Holiday Lettings
  4. UK Furnished Holiday Lettings
  5. EEA Furnished Holiday Lettings

 


More Detail – Digital Record Keeping

The expectation is that the major part of your business record keeping system is digitalised and updated regularly, and for links between different data sources to be automated.

As part of the automation there must be “digital links” between different parts of your accounting systems – this sounds daunting, but put simply there must be a minimum of manual keying, or cut and paste. If you are using a programme or app then Digital Links are likely to be inherent, and the major implications here are for businesses using spreadsheets or businesses with more complex systems.

Generally the digitalisation requirement is from the stage that transactions are entered in your accounting system.

  • eg – suppose you run a cafe and people mostly pay by cash. You do not have a till. You are not expected to keep a digital record of each customers cash payment, but you must keep a digital record of the daily total from customers within your accounting system.
  • eg – as above, but the cafe has a stand alone till. The daily z reading would be the entry to your digital records, not each customer transaction.
  • eg – as above but the till is a EPOS system linked directly to your accounting system – the transactions can be entered individually or as a daily summary, either way they are digitally linked.

 


More Detail – What Goes on the Quarterly Returns

HMRCs latest guidance suggests that (a) reporting requirements will broadly mirror the current detail from Self Assessment and (b) where turnover is below £85,000 three line accounts can be submitted.

Breaking this down further, currently different income streams require different supplements to the Self Assessment.

Trades and professions SA 103F
UK property SA 105
Overseas property SA 106
UK furnished holiday lettings SA 105
EEA furnished holiday lettings SA 105

It is anticipated that the reporting under MTD ITSA will follow the requirements of each supplement.

The threshold for three line accounts, £85,000, is a replication of the current position where businesses with a turnover below the VAT threshold can submit summary information. However full digital records will still be needed, so really the only relaxation is that expense analysis will be less stringent.

 


Choosing Software for Digital Record Keeping

There are a few choices in respect of software for MTD ITSA:

  • Our recommendation to clients wanting an accounting package is normally FreeAgent – which we believe gives a good mix of functionality verses usability for most smaller businesses. We are able to offer our clients a negotiated discount against normal prices.
  • Other options for desktop / cloud programmes and apps include Sage, Xero and Quickbooks.
  • Feature bank accounts are coming on stream that combine banking with record keeping – our review of these suggests a mixed position with some a viable alternative to other software, others needing more development.
  • Spreadsheets – it should be possible to keep records with a well designed and maintained spreadsheet, which connects with HMRC via Bridging Software. Our intention is to support spreadsheets for clients who want to use them, and we plan to offer a Bridging Software plugin in due course.
  • There are various other systems coming to market, and its worth following trends as we expect to see various MTD compliant systems will be launched during coming years – however be aware, and sceptical about, of free offerings which come and go.

As a firm we are “open platform” so will work with your choice of software where possible.

We expect our clients to make available logins and passwords for us to access their cloud system if asked, and to meet the costs of any software supplier charges for accountants logins (some software companies charge, some don’t).

 


Our Involvement as Your Accountant

As you would expect, we are planning ahead.

  • We are aware that the support needs of our clients will vary, and in some cases the changes coming in are quite daunting.
  • It is clear that both ourselves and our clients will need to plan ahead for the implementation of Digital Record Keeping, including transition, training and support.

In terms of our fees our plan is a stratified approach with three levels of service:

  1. A Year End only service at similar fee levels to existing. We would submit the annual year end reconciling return – the simpler quarterly returns you prepare and submit yourself.
  2. A Quarterly Check service – where we check and submit the quarterly returns as well as doing the year end reconciling returns – expect additional fees for this to be roughly £50 to £100/quarter plus vat.
  3. A “Brown Envelope” service where we can take over all data entry and submission – this will be bespoke pricing, as a guide would typically range between £50 and £250/m + vat.

For 1 and 2 you will need to budget for software / apps on top of this; with 3 we can incorporate the software into our agreement with you. We are “open platform” as a firm, so will work, where possible, with your choice of software, but in the absence of any other preference guide clients toward FreeAgent.

In March 2023 we published a Position Statement on how Making Tax Digital for Income Tax may affect the services we offer, and our charges.
Making Tax Digital for Income Tax – Position Statement on Prospective Fee and Service Changes

This is for information and to give a direction of travel – nothing is yet finalised. However we are planing ahead for April 2026, to ensure we and our clients are prepared.

 


December 2022 Deferral Announcement

MTD ITSA was originally due to come in from April 2024, and in December 2022 it was deferred.  Indeed this was a further deferral as the tentative dates had been earlier.

The December 2022 announcement also raised the exemption threshold of £10,000 to £50,000 for April 2026 falling to £30,000 from April 2027.

The deferral brought with it a promise to re-consider the position for Landlords and businesses with turnover below £30,000.

At the time of the deferral HMRCs announcements on MTD ITSA were certainly well behind where they needed to be, and what had been announced in terms of underlying mechanisms will undoubtedly be further refined.  Our guidance above is based on our best expectations, but there is much that could be changed or refined between now and April 2026.

Read our report at the time of the deferral announcement
Making Tax Digital for Income Tax Self Assessment Postponed to April 2026