What is Making Tax Digital for Income Tax Self Assessment?
Definition of Making Tax Digital for Income Tax Self Assessment
Making Tax Digital for Income Tax Self Assessment (MTD for ITSA) is a new way for self-employed business owners and landlords to report earnings and pay Income Tax. MTD for ITSA is part of the government’s wider Making Tax Digital (MTD) initiative.
When does MTD ITSA begin and who will it affect?
HMRC has advised that MTD for ITSA will come into effect from 6th April 2023. Sole traders, partnerships and landlords with a total business or property income above £10,000 per year will have to comply with MTD for ITSA from their first accounting period starting after that date.
Eligible business owners and landlords have been able to sign up to MTD for ITSA voluntarily since 2018 as part of a pilot scheme.
What are the MTD for ITSA rules?
From 6th April 2023, all affected business owners and landlords will need to:
- sign up for MTD for ITSA via HMRC’s website
- keep digital business records
- use MTD-compatible accounting software such as FreeAgent
- send quarterly business income and expenses updates to HMRC through the software
- finalise the business’s income in a declaration which confirms that the updates sent are correct, and make any accounting adjustments
- submit this final declaration to HMRC. This will replace the annual Self Assessment tax return.
How often will affected businesses have to send digital updates and what will they include?
Under MTD for ITSA, instead of sending a Self Assessment tax return to HMRC once a year, business owners and landlords will submit quarterly summary updates of their income and expenditure, followed by a final declaration at the end of the year.
Quarterly summaries will include income and expenses for each self-employment and property business. The timing of the quarterly updates is determined by the business’s accounting period. If the accounting period matches the tax year, the four quarters will be:
- 6th April to 5th July
- 6th July to 5th October
- 6th October to 5th January
- 6th January to 5th April
The quarterly updates will give business owners and landlords a year-to-date calculation of how much tax they owe, based on the information provided in the summary.
Affected business owners and landlords will also be required to use their accounting software to finalise their overall tax position at the end of the year. They will have to add any relevant details about personal income and tax reliefs and include an End of Period Statement (EOPS). The final declaration will replace the Self Assessment tax return.
The deadline for finalising tax affairs and paying Income Tax isn’t changing. As with the current Self Assessment system, business owners will need to do both by 31st January of the following tax year. For example, for the 2023-24 tax year, business owners and landlords will have to submit their final declaration and pay their tax bill by midnight on 31st January 2025.
MTD-compatible accounting software can connect to HMRC’s systems in order to send and receive updates. FreeAgent already supports MTD for VAT and is working closely with HMRC to ensure that small business owners, landlords and their accountants will be able to make MTD for ITSA submissions using the software.
Responsibilities for accountants and bookkeepers
As with MTD for VAT, accountants and bookkeepers will have to set up an Agent Services Account (ASA) in order to submit updates on behalf of their clients.
An important role for accountants and bookkeepers will be to ensure that their clients are aware of their responsibilities regarding MTD for ITSA and are fully prepared for the change.
Find out more about how FreeAgent is helping accountants and bookkeepers prepare for MTD.