As an accountant, you need to ensure your practice is responding to the requirements and challenges brought about by Making Tax Digital (MTD), both now and in the coming years.
It presents a once-in-a-generation change for small business accounting, mandating more frequent reporting to HMRC and – of course – the mandated use of software for accounting.
This article aims to answer essential questions about the upcoming waves of MTD, with a particular focus on the earthquake changes within MTD for Income Tax Self Assessment (also known as MTD for ITSA).
Information here about ITSA is based on the draft Income Tax (Digital Requirements) Regulations, which itself is subject to revision and change.
What’s written below draws on webinars undertaken with representatives from HMRC and hosted by the experts at Sage, most of whom are former accountants.
The questions asked really are those put to the expert panel by practising accountants.
We cover the following:
- MTD for Income Tax: Clients
- MTD for Income Tax: Sign up
- MTD for Income Tax: Record keeping, reporting and submissions
- MTD for Income Tax and Self Assessment
- MTD for Income Tax: General questions and answers
- MTD for VAT: General questions and answers
- MTD for Corporation Tax: General questions and answers
Making Tax Digital: A practice survival guide
Need support with Making Tax Digital, for your clients and your practice? This free guide will help you get ready for MTD for VAT, Income Tax Self Assessment and Corporation Tax.
MTD for Income Tax: Clients
Understanding which clients MTD for ITSA affects, and how, will be key to building out a practice-readiness and response plan for small business clients.
Which of my clients will be affected by MTD for ITSA?
MTD for ITSA will apply to businesses with income greater than £10,000 per year from:
- General partnerships with only individuals as partners
- Property businesses (UK and overseas).
These clients will need to follow the rules for MTD for ITSA from their first accounting period that starts on or after 6 April 2024.
Which of my clients do not need to use MTD for ITSA?
The following are not currently required to join MTD for ITSA:
- Other types of partnership, including Limited Liability Partnerships (LLPs), that are not general partnerships with only individuals as partners
- Trusts and estates
- Trustees of registered pension schemes
- Non-resident companies.
The types of clients mentioned above are exempt from the current digital requirements under MTD for ITSA and will continue to complete and file a Self Assessment tax return if required.
This will be the case until the government mandates their use of MTD for ITSA.
As with MTD for VAT, it’s likely MTD for ITSA will be introduced across the space of several years but we do not yet have details of any further waves beyond the first.
Will limited companies be impacted by MTD for ITSA?
Limited companies are not within scope for MTD for ITSA but will be within scope for MTD for Corporation Tax, which is expected to be mandated from April 2026 at the earliest.
If the business is also VAT registered, will the quarters for VAT submissions be the same as for MTD for ITSA submissions?
According to the draft Income Tax (Digital Requirements) Regulations, the digital start date for income tax reporting may be different to the quarterly reporting periods for VAT.
However, we understand HMRC is looking to address this in the future for those businesses wishing to align their reporting periods to reduce their administrative burden.
Will a VAT registered unincorporated business have to do two sets of quarterly updates, one for VAT and one for MTD for ITSA?
In theory, yes.
However, if the VAT periods and Income Tax periods are aligned, it may be possible to submit the VAT and Income Tax quarterly updates at the same time.
Will VAT and MTD for ITSA deadlines be aligned (e.g. VAT is one month plus seven days whereas ITSA is end of month following)?
There is currently no guidance to indicate the reporting dates will be aligned. However, this may be addressed by HMRC further down the line.
Does the £10,000 MTD for ITSA threshold apply to the landlord or each property?
The £10,000 threshold applies to the total of a taxpayer’s property income and turnover from self-employment.
The threshold would therefore relate to the landlord as opposed to individual properties.
How many submissions will my clients need to do for a two-property rental business with MTD for ITSA?
The number of properties has no impact on the number of submissions. They will need to submit:
- Four quarterly updates covering the income and expenses of all properties
- An End of Period Statement with any adjustments to the net profit or loss for the period
- A final return with all other income, gains and reliefs.
If a client has a self-employment business that is below the £10,000 threshold but they have property income that would push them over the threshold, will they need to comply with MTD for ITSA?
The draft Income Tax (Digital Requirements) Regulations suggest that the threshold relates to the total income from a taxpayer’s self-employment and property businesses.
If my MTD for ITSA client has a single property but income is more than £10,000, will I now need software to do their tax submission?
Unless the client is exempt from digital reporting, the rules for Making Tax Digital for Income Tax will apply if the total income from property and self-employment exceeds the threshold.
Are partnerships affected by MTD for ITSA? When will partnerships need to comply with the rules for by MTD for ITSA?
From April 2025, MTD for ITSA will apply to general partnerships with only individuals as partners and income of more than £10,000 per year.
HMRC hasn’t provided a timeline for any other partnerships, including LLPs.
Will LLPs be included within the scope of MTD for ITSA?
All other partnerships, including LLPs, that are not general partnerships with only individuals as partners are not included within MTD for ITSA’s initial wave.
These might be included in a future wave of MTD for ITSA mandation, but we’ve yet to receive information from HMRC.
How will the tax estimates apply to partnerships with MTD for ITSA?
Tax estimates don’t apply to partnerships as they don’t have a tax liability.
Will MTD for ITSA apply to Construction Industry Scheme (CIS)-registered subcontractors?
Yes, there are no exclusions for individuals whose income is partially or wholly within the scope of CIS.
Will CIS rebates be generated quarterly as opposed to after the tax year with MTD for ITSA?
HMRC hasn’t indicated any changes to CIS due to the introduction of MTD for ITSA.
MTD for Income Tax: Sign up
The successful sign up of clients for MTD for ITSA will be the first step to improved client service, so it’s vital that you get it right.
When do my clients need to sign up to MTD for ITSA?
Your clients (or you on their behalf) will need to sign up to MTD for ITSA in advance of their digital start date (see “What is a digital start date for MTD for ITSA?” below).
How do I sign up to MTD?
There is guidance provided by HMRC for both Business sign up and Agent sign up at Gov.uk.
Will I need a new agent services account for MTD for ITSA, or will I use the same one as for VAT?
You can continue to use the same agent services account that you set up for MTD for VAT.
However, you will need to copy your client’s existing authorisation for Self Assessment from your HMRC online services for agents account to your existing agent services account.
Will I need to renew my 64-8 authorisations under MTD (ITSA and VAT)?
If a client is not authorised on your agent services account, you can either:
- Copy your client’s existing authorisation to your Agent Services Account, or
- Ask the client to sign their own business up, then authorise you for Making Tax Digital for Income Tax.
Will clients already signed up to MTD for VAT need to also sign up for Income Tax?
If they meet the specified criteria, your clients (or you on their behalf) will need to sign up for MTD for Income Tax.
Is there an MTD for ITSA pilot programme?
Yes. This launched back in April 2018, albeit with limitations on what kinds of business could sign up.
However, as time goes on the pilot programme is opening to more and more businesses. Accountants can sign up clients using at Gov.uk.
MTD for ITSA-compatible software will have to be used to take part in the pilot.
MTD for Income Tax: Record keeping, reporting and submissions
The nitty gritty of MTD for ITSA revolves around digital record keeping and more regular submission to HMRC, including quarterly updates, end of period statements (EOPS) and a final declaration.
How many submissions will I need to file for my clients with MTD for ITSA?
The number of submissions will depend on the number of businesses the client has.
For each business, you will need to file four quarterly updates and an End of Period Statement to finalise business profits.
In addition, if your client has income from property then four quarterly updates and an end of period statement will need to be filed for property income.
You will then submit a Final Return with any other income, gains or reliefs.
How will information about personal income be submitted with MTD for ITSA?
Any non-business income will be submitted after the end of the tax year in the MTD for ITSA Final Return.
Do the quarterly updates for MTD for ITSA need to include any personal income or just business income?
The quarterly updates only need to include a summary of income and expenses for the business. Non-business income does not have to be submitted periodically.
Will there be any changes to how tax is paid with MTD for ITSA?
No, MTD for ITSA only refers to digital reporting requirements.
It does not affect existing tax rules, including how and when tax is paid.
What happens if I need to amend a submission with MTD for ITSA?
HMRC has stated that corrections to a quarterly update can be made when a subsequent quarterly update or End of Period Statement is submitted, whichever is due first.
Will spreadsheets still be OK to use as a digital record-keeping solution with MTD for ITSA?
The expectation is that spreadsheets will be as acceptable for MTD for Income Tax as they are for MTD for VAT assuming they are MTD-enabled or used with bridging software.
What is a digital link under Making Tax Digital (ITSA and VAT)?
A digital link is where data is transferred or exchanged electronically and is a key component of all Making Tax Digital legislation (VAT, ITSA and likely Corporation Tax).
A digital link should not involve any manual intervention, such as copying and pasting or retyping information.
If I am using a spreadsheet to keep records, will using formulas be compliant with Making Tax Digital (ITSA and VAT)?
The definition of a digital link includes linked cells in spreadsheets.
For example, if you have a formula in one sheet that mirrors the source’s value in another cell, then the cells are linked.
What do I do if my software does not allow me to export information in a way that complies with Making Tax Digital requirement for digital links?
To follow the rules for Making Tax Digital for Income Tax, you’ll need to get compatible software.
To check which software packages are compatible, visit the HMRC website.
Will I be able to copy and paste data with Making Tax Digital (ITSA and VAT)?
HMRC does not consider the use of ‘cut and paste’ or ‘copy and paste’ to select and move information to be a digital link.
Will the quarterly obligation periods align to the tax year or the accounting period with MTD for ITSA?
According to the draft Income Tax (Digital Requirements) Regulations, the quarterly obligation periods will depend on the digital start date for a business, which is aligned with its accounting period.
How long after the end of the quarter will I have to submit the update with MTD for ITSA?
According to the draft Income Tax (Digital Requirements) Regulations, quarterly updates are due one month after the end of the quarter.
Does the £10,000 threshold refer to income or profit with MTD for ITSA?
The threshold refers to income rather than profit.
The draft Income Tax (Digital Requirements) Regulations suggest this relates to the income for the accounting period two years before the period in question.
For example, for a period ended 5 April 2024, this would normally be the income for the period ended 5 April 2022.
If my client has multiple businesses which each are below the £10,000 but collectively have income over the threshold, will they be within scope of MTD for ITSA?
The threshold relates to the sum of the businesses.
So income across all businesses that would normally be included in your Self Assessment return should be used to assess whether the individual is within scope of MTD for ITSA.
MTD for Income Tax and Self Assessment
MTD for ITSA doesn’t mean the end of Self Assessment – at least not in the initial April 2024 rollout.
Self Assessment will still be a requirement for many who aren’t within the scope of MTD for ITSA.
It might even continue to be a necessity for many who are mandated for MTD for ITSA, as described below.
If the qualifying income is below the £10,000 MTD for ITSA threshold, will they continue with the current process for Self Assessment?
Yes, if qualifying income is below £10,000 then they are exempt from the current digital requirements under MTD for ITSA and will continue to complete and file a Self Assessment tax return if required.
How does MTD for ITSA change the current process for Self Assessment?
Similar to MTD for VAT, MTD for ITSA requires businesses and landlords to keep their records digitally and to submit quarterly updates of business income and expenses to HMRC using MTD-compatible software.
Business owners and landlords will no longer file an annual Self Assessment tax return.
Instead, they will be required to send tax adjustments (the End of Period Statement) for each business, as well all other details to finalise their overall tax position (the Final Return) after the end of the tax year.
Will I still have to complete a Self Assessment tax return for my client with MTD for ITSA?
You will only need to complete a Self Assessment tax return for clients within the scope of MTD for ITSA if the information you need to submit is not supported under Making Tax Digital.
With MTD for ITSA, will the current Self Assessment process change for clients that do not have property or self-employment income but complete Self assessment for other reasons?
No. MTD for ITSA only applies to individuals with income from self-employment or property businesses that are subject to Income Tax.
If your client is required to complete a Self Assessment tax return for another reason they will continue to do so in line with the current process.
MTD for Income Tax: General questions and answers
Here are some questions about MTD for ITSA that fall outside of the main categories discussed above.
Will I still be able to offset losses between businesses with MTD for ITSA?
Yes, MTD for ITSA does not affect existing tax rules – just how the information is reported. Under MTD you can still claim loss relief as you would under Self Assessment.
What is a digital start date for MTD for ITSA?
According to the draft Income Tax (Digital Requirements) Regulations, the digital start date is the date from which a business must keep digital records and make quarterly submissions.
For self-employments, the digital start date is the day after the first accounting period that ends on or after 5 April 2024 (2025 for general partnerships).
For property businesses, the digital start date is 6 April 2024.
Will it be essential to use software to comply with the rules of MTD for ITSA?
Yes, a relevant entity must use functional compatible software to comply with the following requirements (“the digital requirements”):
(a) to record digital records
(b) to preserve those digital records
(c) to provide a quarterly update
(d) to provide, as applicable, an end of period statement or a Schedule A1 partnership return.
Can the bookkeeping solution and the tax solution be different for MTD for VAT/ITSA, or will I need a single provider for the full process?
Bridging software is the name for solutions that combine information from different software and digitally submit the submissions to MTD.
Solutions that use bridging software will meet the MTD requirements so long as digital links are preserved
Will Sage software be compliant with MTD for ITSA?
Sage will have solutions for our customers to meet their MTD for ITSA obligations.
Sage is working closely with HMRC, accountants and small business owners to understand and build a great user experience to support the next wave of Making Tax Digital that covers Income Tax.
Will we have to pay for MTD for ITSA-compatible software?
Customers will need to be on the latest version of their Sage software to benefit from MTD for ITSA enhancements.
This is likely to require that customers have valid software subscriptions.
MTD for VAT: General questions and answers
Although many accountants have worked on MTD for VAT for several years, they often ask specific questions.
Here are some answers.
Do VAT-registered businesses with turnover below £85k have to sign up to MTD for VAT?
All VAT-registered businesses need to sign up to MTD for VAT unless HMRC approves that the business is exempt.
What were the changes in how VAT submissions could be filed in April 2021?
HMRC stopped accepting electronic VAT returns via the legacy XML gateway.
Businesses voluntarily registered for VAT and which used the XML gateway must use MTD for VAT.
How will MTD for VAT work for a group of companies sharing the same VAT number (which is to say, group consolidation)?
There is no change to the rules for VAT groups.
If a VAT group’s turnover is above the VAT threshold (currently £85,000), they will already be required to keep digital records and report via MTD.
If the group’s turnover is below the threshold and they are a voluntary filing VAT group, the rules will apply in line with individuals, and they have to use MTD for VAT.
Will a VAT registered unincorporated business have to do two sets of quarterly updates, one for VAT and one for Income Tax?
Yes, although businesses can synchronise their year ends so the quarterly filing obligations can be completed at the same time.
Are bridging solutions still acceptable for MTD for VAT?
Will the quarterly obligation periods for MTD for VAT align with those for MTD for ITSA?
Businesses will not be required to align their obligation periods but may prefer to align dates to simplify their business processes.
MTD for Corporation Tax: General questions and answers
Although we don’t yet know a lot of detail about MTD for Corporation Tax, we know the broad outline of what’s planned and this is unlikely to change.
When is MTD for Corporation Tax (CT) mandated?
The government has said it will not mandate MTD for CT before 2026.
Many have interpreted this as the government implying the first wave of MTD for CT will be introduced in April 2026.
But this is far from certain, and the government has postponed MTD scheme introduction dates several times in the past (often several times).
What do we know about MTD for CT right now?
The government recently completed a consultation phase and, as part of that, published a document that contains some details of the MTD for CT plans.
Among other things, this provides customer journey flow diagrams that show how MTD for CT is likely to function, and the role of the accountant within it.
At the moment, we know that MTD for CT will require:
- Digital record keeping.
- Quarterly summary updates of income and expenditure to HMRC. As with MTD for ITSA, this will show expected CT liability.
- Digital submission of a Corporation Tax Return. This can be done by the accountant on behalf of the client following adjustments and claims for relief.
When will the MTD for CT pilot programme begin?
HMRC says it expects this to start in April 2024.
At that point interested businesses can sign up ahead of time, provided they’re using MTD for CT-compatible software.
How can I prepare clients for MTD for CT?
Many businesses mandated for MTD for CT will already have experience of MTD for VAT, so this will help with education and awareness.
However, the biggest problems are likely to be encountered at the extreme ends of the business size scale.
Small, incorporated businesses that don’t currently use digital accounting will need to make the switch to doing so.
Large businesses that have disparate systems for recording accounting data will need to ensure they’re digitally linked.
What will be the role of accountants with MTD for CT?
At the very least, HMRC envisions that accountants or tax agents will need to step in nine months after the accounting period in order to make required adjustments, claim any reliefs, and finalise the liability.
However, this is subject to change as more detail is released about MTD for CT.
Making Tax Digital is going to be one of the biggest and best business opportunities for accountants in the coming decade. Learn how to save time and money by adding automation with our ROI calculator.
Learning about its requirements are just the start.
Practice preparation programmes should already be underway to not only provide what clients need but also to make the most of all the opportunities presented.
More touchpoints with clients, the chance to adopt a more advisory role, and even the opportunity to help clients not just upgrade their software but learn how it’s used – growth in your practice really is down to your ability to exploit opportunity.
But one thing is key – you should start now and put Making Tax Digital at the heart of everything you do.
Editor’s note: This article was first published in July 2021 and has been updated for relevance.
Making Tax Digital: A practice survival guide
Need support with Making Tax Digital, for your clients and your practice? This free guide will help you get ready for MTD for VAT, Income Tax Self Assessment and Corporation Tax.
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