Written by Director of Transformation, Russell Frayne
Making Tax Digital for Income Tax (MTD ITSA) is a government initiative aimed at modernising the tax return process. Businesses and individuals will need to keep digital records of transactions, sending quarterly updates to HMRC. The Government hopes that the quarterly submissions will enable a more accurate projection of tax due.
For income tax, quarterly updates will show total income and expenses. You must submit an end-of-period statement for each tax year by 31st January following the year’s end. This statement may include accounting adjustments, relief claims, or allowances.
Why does Making Tax Digital matter?
The policy of MTD ITSA has been in the pipeline for many years, quietly moving forward in the background. While it’s an important goal for HMRC, it’s been interesting to see how it has fit into the Government’s priorities and agendas over time and the policy has often shifted in importance. However, from our discussions with HMRC, it is unlikely the initiative will be scrapped under the new Labour Government.
MTD ITSA requires those meeting the necessary criteria (outlined in the chart below) to maintain digital records on MTD compliant software and then submit quarterly updates to HMRC using the software, via a digital link. There are added complexities for additional submissions for different income streams – which require multiple quarterly submissions. As we will discuss, doesn’t have to spell doom and gloom.
When do you need to act?
The roll out has two phases dependent on the taxpayers’ level of income. In December 2022, the government moved the date of first cohort’s mandatory transition from April 2024 to April 2026. Whilst this delay was welcomed by many that were not prepared for the changes, it has also meant that businesses and individuals have taken their eye off the ball and will find themselves in a similar position come April 2026 if they don’t act soon.
| Phase One | Phase Two | |
| Category of taxpayer | All self-employed individuals and landlords with annual business or property income above £50,000 | All self-employed individuals and landlords with annual business or property income above £30,000 |
| When MTD ITSA kicks in | From April 2026 | From April 2027 |
We’re in October 2024 and there are around 350 working days until the first phase of Making Tax Digital commences. There are around 450 days until the first quarterly submissions are due, so there is still time. However, the process of registering and becoming compliant with MTD ITSA can be time consuming.
The closer we get to implementation day, the busier accountancy firms around the country will be. Therefore, from a business perspective, we recommend having these conversations now, to ensure everything is in place and working as intended.
Your category depends on the total of both self-employment and rental income – think SA103 and SA105 and don’t assume the different streams of income are taken in isolation.
Guidance from HMRC
HMRC recently released new guidance to work out your qualifying income for MTD ITSA to assist those looking to understand whether they qualify and for which phase. You can access this new guidance here.
It covers several examples combining both self-employed and rental income, as well as questions around jointly owned property, partnerships and residency affect qualifying income.
One example provided is:
Your gross income (before any deductions) is as follows:
- £25,000 from rental income
- £27,000 from self-employment income
In this example your total qualifying income would be £52,000, and therefore in scope for MTD ITSA.
To help you out, HMRC has put together a useful tool check if Making Tax Digital for Income Tax is relevant to you.
Embracing the change
More often than not the biggest challenge that comes with any new regime is the resistance to change, and MTD ITSA is no different, because it requires business owners and landlords, who have historically been more tech adverse, to move with the times and adopt digital solutions in order to remain compliant.
Embracing the change however brings many benefits:
- Improved oversight of your business results
- Better tax planning against future liabilities – with no last-minute running into a tax liability you are unaware of
- Improved methods of raising invoices and accepting payments, thereby improving cashflow
- The ability to easily capture and store your receipts and paperwork so you never lose your tax-deductible receipts again!
Act now
Ahead of the two implementation phases in April 2026 and 2027 we recommend the following steps to best set yourself up ahead of your first filing period:
- Understand which implementation phase date applies to you
- Understand your requirements under MTD ITSA
- Review and select your required software solution
- Think about setting up a separate bank account – many businesses and landlords use their personal account to receive income and pay expenses, the process for MTD ITSA will be immensely easier if you were to set up separate bank accounts for your self-employment and landlord activity.
- Implement early! Moving onto your chosen platform early ensures you have the most time to familiarise yourself with the platform and the processes around it – ahead of needing to use it to file your MTD ITSA submissions.
How we can help
Gravita has tech enabled specialists who are skilled in helping clients make the right decisions and get the most from their digital solutions. To learn more about Making Tax Digital or discuss software migration options, get in touch with Russell Frayne, Director of Transformation.
