Initially planned to launch in 2018, Making Tax Digital for income tax self-assessment (MTD for ITSA) has faced various challenges in its implementation.
Although MTD for VAT was successfully introduced for returns starting on or after 1 April 2022, MTD for ITSA has been delayed five times over the past five years. As a result, self-assessment customers will now only have to comply with these rules from 6 April 2026.
Additionally, the implementation of these new regulations will not impact all taxpayers at once, instead, a gradual approach will be taken to ensure a smooth transition.
The phased approach
By April 2026, only self-employed individuals and landlords who make over £50,000 annually will be required to comply with MTD for ITSA. Those who make £30,000 or more will be required to keep digital records starting from April 2027.
The Government is currently conducting a review to address the concerns of smaller businesses, and there is no set date for the extension of the law to partnerships.
Reasons for the delay and other changes
The ICAEW suggests that the Government can take advantage of this deferral to properly implement MTD for ITSA.
The Treasury recognized that businesses throughout the UK are facing difficulties due to the economic impact of the Covid-19 pandemic and the continuing issue of high living expenses.
Therefore, the shift to a different method of taxation will cause self-assessment clients to bear a greater workload in terms of administration, since numerous individuals are still unaware of the guidelines for MTD for ITSA.
The Government wants to postpone the regulations in order to provide clients with additional time to prepare their finances and become acquainted with software that supports MTD.
In addition, the suggested gradual method may be advantageous to numerous taxpayers, particularly those who make less than £30,000 annually. By having additional time available, HMRC can explore methods to modify the new service in order to assist individuals with the lowest incomes.
The ICAEW commented that the postponement was unavoidable because of the limited number of individuals taking part in the MTD for ITSA trial, as well as difficulties encountered in digitizing the tax reporting process for specific types of earnings.
What you need to do for MTD for ITSA
- Keep digital records
After the implementation of MTD for ITSA, self-assessment clients are required to utilize MTD-compatible software to establish and maintain digital records of all financial activity related to their business.
HMRC’s official website provides a comprehensive list of compatible software options, and users must still provide their Government Gateway login credentials to authorize their chosen software before use.
- Send quarterly updates to HMRC
After installation, your software will tally your electronic records every quarter without prompting and produce sums for all income and expenditure groups.
The tax bill estimation will be provided through quarterly updates. It is not mandatory to modify these updates, however, doing so may enhance the accuracy of the estimation.
Your software provider will remind you to submit updates to HMRC for every source of income every three months. Failing to do so within a month of the end of each standard quarterly period will result in a penalty.
Customers who have multiple businesses will be required to fulfill the requirements for each business individually, which entails maintaining distinct records and submitting separate reports for each source of income.
- Finalise your business income
Instead of filling out a self-evaluation tax form annually, you will have to conclude your business revenue with a concluding statement at the end of the period called the End-of-Period Statement (EOPS).
It is advisable to make any necessary tax or accounting modifications to your EOPS before submitting it finally.
At present, it seems that the existing deadlines for tax payments and payments on account will remain unchanged, therefore, it is necessary to continue to mark those dates in your calendar.
As per HMRC’s guidelines, your software provider will assist you in fulfilling these obligations by reminding you to submit updates on schedule and offering guidance on how to adapt to this novel mode of operation.
If you wish, you have the option to empower a representative to act in your place. This implies that if your accountant is presently managing your self-assessment returns as per the existing regulations, there will be no requirement to provide them with re-authorization for MTD for ITSA.
Although adopting MTD for ITSA is a major shift, there are multiple benefits to maintaining electronic records that go beyond just ensuring adherence.
Why you should keep digital records
The way we handle our taxes has been transformed by technology, and traditional paper-based records are rapidly fading away, not solely due to the forthcoming MTD regulations. Keeping your financial information in a digital format provides numerous advantages.
Instant updates
By maintaining electronic files, there is no need to search for the most recent financial records in a chaotic manner. Rather, all the requisite data can be saved in a virtual storage space and revised instantaneously.
After completing the signup, you’ll have the capability to produce immediate reports and predictions with the assurance that you’re utilizing the most up-to-date data.
In addition, the MTD for ITSA system will provide you with automatic quarterly updates, enabling you to monitor your estimated tax amount more closely throughout the year. This will give you more time to save money before the self-assessment deadline.
Freedom to work from anywhere
As long as you have a device that can connect to the internet, it is possible to access your account and view up-to-date information regardless of your location, whether it is in your house, workplace, or on a lengthy train ride.
Stay secure
Utilizing MTD-compliant software can aid in safeguarding your data. It enables you to control access to financial data by selecting authorized parties and modifying permissions easily with a simple click.
By saving all data in a digital format, the process of making backups will become simpler, which in turn will decrease the likelihood of losing valuable information.
Easy collaboration
Collaborating with your accountant while on-the-go is made easy with cloud accounting software. This software allows several users to access the same data at the same time, enabling efficient collaboration and minimizing the possibility of using old information.
Starting your digital journey
Although the implementation of MTD for ITSA regulations is a few years away, taking the digital route sooner rather than later can assist you in preparing well in advance of 2026.
If you’re looking for Accountants Bolton, then look no further than YRF. Here at YRF Accountants, we can help you with your MTD Self Assessment. Get in touch to find out how we can support your business with MTD for ITSA. Use the form below to leave your details