MTD for ITSA: The basics

It’s vital that practitioners get their heads around the Making Tax Digital Income Tax (MTD ITSA) conversion, and understand how it will impact their clients. John Edwards, CEO of the Institute of Financial Accountants (IFA), urges accountants to communicate to clients now ahead of the April 2024 deadline, to ensure as smooth a path as possible.    

Who will MTD ITSA affect?

Practitioners will already be aware that MTD ITSA will affect any individual earning over £10,000 gross income each year from self-employment or property. Under the new regime, unincorporated businesses will have to file quarterly updates on or by every 5 August, November, February and May. They will also have to file an annual end-of-period statement (EOPS) on or before 31 January after the tax year they’re filing for.

Quarterly update 

Each quarterly update will consist of the totals of income and expenditure (sorted into categories) for the quarter, pulled directly from the digital accounting records, with no adjustments made for disallowable items, allowances, losses or other accounting adjustments. The submission of the quarterly update, up to one month after the end of the quarter, simply proves to HMRC that the business is digitally recording its accounting data in a relatively timely manner. 

After receipt of the quarterly update, HMRC will feed back to the taxpayer an estimated amount of their tax liability for the period, probably through the online business tax account. The taxpayer doesn’t have to do anything with this information, as it doesn’t create a tax liability.

Annual accounts

The annual accounts for the business, as currently reported on the self-employed section of the tax return, will be submitted to HMRC on the EOPS by 31 January after the tax year end. This report will include all the accounting adjustments for the year, but there is no requirement to tie the EOPS to the figures reported in the quarterly updates.

The finalisation statement 

The finalisation statement is the replacement for the current self-assessment tax return and is used to calculate the tax liability for the year. It will include the taxable business income from the EOPS and all other income, gains and claims, which need to be reported for income tax.

The finalisation statement will have to be submitted by 31 January following the tax year end, the same deadline as the current tax return, but there will be no option to submit a paper tax return instead. All the MTD ITSA reports will have to be submitted using MTD compatible software, but this could be a combination of API-enabled spreadsheets and other tax software.

Will HMRC tell clients that they need to move to MTD?

No. It is up to taxpayers and their agents to recognise which businesses are caught by MTD ITSA and to register (via gov.uk website) for MTD. Before agents sign up their clients, they will need compatible software to submit their VAT Return and an agent services account.

What happens if clients don’t comply with the new requirements?

There will be penalties for non-compliant taxpayers, which are likely to be behaviours-based, but the mechanics and timings of this have not been publicised at the time of writing.

My clients use paper records at the moment and are useless with IT. Can they request exemption on the grounds of lack of IT awareness?

Businesses that have already been granted exemption from online filing under the current rules (for example on grounds of religious, age, disability or internet access issues) are expected to be granted exemption from MTD requirements as well.

When should I start preparing for MTD for ITSA?

Having been through something similar with MTD for VAT, the chances are that you are already adept at helping clients with some of their technical challenges. The MTD for ITSA rules will apply from 6 April 2024, but it is advisable for clients to start preparing for upcoming changes ASAP as the transition is likely to run more smoothly and means they could save time in the long run. You could also encourage clients to join the MTD for ITSA pilot scheme – not only is it an opportunity for them to get ahead of the curve, it’s also a good idea to help familiarise themselves with it sooner rather than later. 

Keeping up to date with the legislation to understand how MTD ITSA will impact the kinds of clients a firm has, is essential. This is particularly relevant in areas where clarification is still to come, for example, filing for multiple sources of income and landlords with shared ownership of properties. Although there is no hard deadline, HMRC has suggested that the technical details will be available at some point in the near future.