Making Tax Digital for income tax self-assessment (MTD ITSA) might have been delayed until April 2024, but that doesn’t make it any less important to get ready for.

MTD is the Government’s flagship policy to modernise the UK’s tax regime.

David Gauke, former financial secretary to the Treasury, stated: 

“Tax returns will be replaced by digital tax accounts for millions of individuals and businesses.”

“They will bring together each taxpayer’s details in one place, just like an online bank account, so they can register for new services, and understand quickly and easily what they need to pay – without ever having to complete a tax return again.”

Up next on the agenda after the implementation of MTD for VAT, is MTD ITSA. It was meant to come in April 2023, but the Treasury pushed it back by 12 months to give businesses more time to prepare and recover from the pandemic. 

Nevertheless, it’s important to understand what MTD ITSA is and what you need to do so you can rest assured that you’re fully prepared for the change.

Who will MTD ITSA affect?

MTD ITSA will affect most self-employed taxpayers with business or property income over £10,000 a year. For now, general partnerships are excluded.

As part of the scheme, all unincorporated businesses will need to file quarterly returns on or before 5 August, 5 November, 5 February and 5 May every year.

Quarterly returns will consist of total sales and expenses that arise every three months, thought to be very similar to the current format of a self-assessment tax return.

Businesses will also have to file an annual end-of-period statement on or before 31 January following the end of the relevant tax year.

From 6 April 2025, most unincorporated business partnerships that have business or property income and only individuals as partners, will also have to abide by MTD ITSA rules.

The exact date at which all other partnerships, such as those with corporate partners and limited liability partnerships, will join the scheme is yet to be determined.

Accounting software

To remain compliant with MTD ITSA rules, businesses will have to keep digital records of any sales they make and expenses they incur during the tax year. Find software that’s compatible with Making Tax Digital for Income Tax – GOV.UK

To do that, they must use MTD-compatible software, such as Sage, Xero and Quickbooks. Alternatively, they can continue to use spreadsheets as much as they put in place special bridging software.

Cloud accounting software like Xero will benefit you much more, however, as the benefits of such platforms go far beyond staying compliant with MTD.

Yet, they’re all different and certain platforms may benefit you more than others.

For instance, while Xero is reasonably priced, premium and additional costs can easily rack up. And Quickbooks, as wide-ranging as it is, might not be the easiest software to use for someone completely new to cloud accounting.

Cloud accounting is a complex topic, so if you need advice on how to choose the right platform for you, don’t hesitate to reach out to us.

Bear in mind that there is an MTD ITSA pilot scheme currently open to eligible taxpayers, which you can join to get ahead of the competition by getting used to the accounting practices that will be compulsory in just a few years.

What else do you need to know about MTD?

VAT-registered businesses will be familiar with MTD, with VAT-registered businesses with a taxable turnover above the registration threshold (£85,000) having been part of MTD for VAT since 2019.

Since 6 April 2022, every VAT-registered business, regardless of turnover, has had to follow MTD rules.

Up next, of course, will be MTD ITSA, before MTD for corporation tax comes into effect, which HMRC says won’t be until at least April 2026.

However, it proposed April 2024 as the month when it intends to commence a voluntary pilot scheme for MTD for corporation tax.

At James Scott, we work with a range of businesses to help them with their accounting needs. 

Talk to us about MTD ITSA.