Making Tax Digital: Where Are We Now?
The phased introduction of Making Tax Digital for Income Tax Self-Assessment (MTD ITSA) is drawing closer, with significant changes set to take effect over the next few years. Understanding these requirements is essential for self-employed individuals and landlords, as the new system will fundamentally change how income is reported to HMRC.
Key Dates for MTD ITSA Implementation
MTD ITSA will be rolled out in stages based on annual gross income:
| Annual Aggregate Turnover | Implementation Date |
|---|---|
| More than £50,000 | April 2026 |
| £30,000 – £50,000 | April 2027 |
| £20,000 – £30,000 | Before the end of this Parliament (2029) |
The government announced in the Autumn Statement 2024 that the lowest band (£20,000 threshold) will be introduced before the end of the current Parliament but has not yet confirmed an exact date.
For those earning above £50,000, the measurement year to determine eligibility will be 2024/25, meaning that tax returns submitted by January 2026 will dictate whether a taxpayer falls under MTD ITSA from April 2026.
Key Considerations for MTD ITSA
1. How Thresholds Are Measured
- The threshold is based on gross annual income from all business sources, including self-employment and rental income.
- If a taxpayer has multiple business activities, such as trading and property rental, their total income from both sources will be considered.
- Once a taxpayer falls within MTD ITSA, they must remain within the system unless their income remains below the threshold for three consecutive years.
2. Separate Reporting for Different Business Activities
- If an individual has multiple business interests, such as a sole trade and a property business, each will require separate quarterly updates.
- However, property income is usually combined into a single property business, unless the taxpayer has UK and offshore rental properties or properties under different ownership structures.
3. Joint Property Ownership and Reporting
- HMRC will determine a taxpayer’s eligibility for MTD based on the gross rental income reported on tax returns.
- In joint property ownership cases, landlords can choose to report only their share of net income, which could result in their total taxable income being understated for MTD thresholds.
- HMRC has confirmed that this easement will continue, even though it may lead to discrepancies in measuring MTD eligibility.
How MTD ITSA Reporting Will Work
1. Quarterly Updates Instead of Annual Tax Returns
Under MTD ITSA, taxpayers will need to submit four quarterly updates instead of a single annual tax return.
Quarterly deadlines:
- 7 August
- 7 November
- 7 February
- 7 May
Each update must include income and expenses recorded so far in the tax year. Initially, HMRC planned to track changes between updates, but this requirement has now been removed.
2. Final Declaration Instead of an End-of-Year Statement
- The End of Period Statement (EOPS) has been scrapped.
- Instead, all year-end tax adjustments (e.g., capital allowances and disallowed expenses) will be made in the Final Declaration.
- This final submission will effectively replace the traditional Self-Assessment tax return, despite initial government claims that annual tax returns would be eliminated under MTD.
Exemptions and Exclusions from MTD ITSA
Who is Automatically Exempt?
Certain taxpayers are exempt from MTD ITSA, including:
- Trustees
- Personal representatives of deceased individuals
- Lloyd’s members
- Foster carers (announced in the Autumn Statement 2023)
- Individuals without a National Insurance number
However, these exemptions apply only to their specific income streams. If a taxpayer has both exempt and non-exempt income, MTD ITSA will still apply to the non-exempt business.
Who Can Apply for an Exemption?
A wider exemption may be granted in cases where a taxpayer can prove that they are unable to comply due to:
- Age or infirmity
- Remoteness of location (poor internet access)
- Religious beliefs
Currently, HMRC allows paper applications for digital exclusion, but this may change over time.
Challenges and Concerns with MTD ITSA
1. Digital Record-Keeping Requirements
The most significant challenge of MTD is not just quarterly filing, but the requirement to maintain digital financial records in a format compatible with HMRC’s software.
For many businesses, this means adopting accounting software or digital bookkeeping methods to ensure compliance.
2. Increased Administrative Burden
Despite the government’s claims of reducing bureaucracy, MTD ITSA increases the frequency of tax reporting. Instead of one annual tax return, businesses will need to submit:
- Four quarterly updates
- A Final Declaration
- Separate reports for each business activity
3. Potential Issues for Small Businesses
Lowering the threshold to £20,000 means that many smaller businesses and landlords will be affected by MTD ITSA, even though their administrative capacity may be limited.
Some business owners may consider incorporating into a limited company to avoid MTD ITSA, as MTD for corporation tax has not yet been introduced. However, incorporation comes with its own tax and compliance considerations.
Final Thoughts: Preparing for MTD ITSA
With MTD ITSA set to roll out in 2026, self-employed individuals and landlords must prepare now by:
- Reviewing income levels to determine when they will be affected.
- Switching to digital record-keeping in compliance with MTD requirements.
- Exploring compatible accounting software for smooth reporting.
- Understanding the deadlines and filing obligations under MTD.
- Seeking professional advice to ensure compliance while minimising administrative burdens.
While the full impact of MTD ITSA remains to be seen, it is clear that the government is committed to fully digitising the tax system. Businesses and landlords should start planning now to ensure a smooth transition.
Need Help with MTD Compliance?
At Merranti Accounting, we help businesses prepare for Making Tax Digital, ensuring compliance with minimal disruption. Contact us today to discuss digital bookkeeping solutions and tax planning strategies tailored to your needs.
