Making Tax Digital for Income Tax is part of the government’s wide-ranging initiative that will eventually require virtually all businesses in the UK to do their government taxes via software.
The government says Making Tax Digital (MTD) in all its forms will help businesses and individuals get their tax right.
It says this will close the £31bn “tax gap” – the amount of tax that isn’t paid through errors in accounting, among other causes. Of that, £12.1 billion is income tax, National Insurance contributions and Capital Gains Tax.
The first part of MTD became a legal obligation in April 2019 for most VAT-registered businesses with turnover above the VAT threshold.
MTD for VAT means businesses are required to keep their VAT accounting records digitally and file VAT Returns using “functional compatible software”.
The government made it clear that other forms of tax paid to HMRC – such as income and corporation tax – would follow.
In July 2020, a new roadmap was announced that laid out the plans for MTD for Income Tax. This included the all-important start date.
We take a look at some of the key points of MTD for Income Tax here.
1. What are the MTD for Income Tax rules?
This is what we know so far about the MTD for Income Tax requirements, pending legislation being published by the government.
This is based on what the government has announced so far, as well as the rules for the MTD for Income Tax pilot scheme (see “What’s the MTD for income tax pilot?” below):
MTD for Income Tax scope
The majority of businesses and landlords with business or property income above £10,000 will be required to use compatible software for their income tax accounting for the first full accounting period starting on or after 6 April 2023.
Self Assessment changes
Instead, for each of their businesses, individuals will need to submit at least quarterly updates, an end of period statement (EOPS) and a Final Declaration (see below).
While this may sound like a lot of documentation, software will automate the tasks, and most taxpayers will find they do less admin work than under the traditional Self Assessment process.
Under the MTD for Income Tax rules, an update about each of your business income and expenses has to be sent to HMRC via software every three months (or more frequently if you choose to).
You’ll also need to send a quarterly update for any income from property that you own.
You’ll then see a more up-to-date estimate of how much tax you owe. But this will only be based on the information you provide, so won’t take into account any adjustments that you make at the year-end for assets or reliefs.
End of Period Statement (EOPS)
At the end of each accounting period (i.e. your tax year for each business), you’ll need to make an EOPS for each business that you own, and also an EOPS for income from property (if you have any) that includes any adjustments that are needed.
This is similar to the current process for the SA103 & SA105 schedules.
Notably, the EOPS applies to each business, rather than the individual, so you may find yourself submitting more than one.
It’s likely that if you use an accountant or adviser, they’ll help with this to help take advantage of any allowances and tax reliefs that can be claimed, and support you with any complex calculations such as accounting for leases, assets, R&D etc.
Final Declaration each year
After the end of your accounting period, you need to “crystallise” your income tax.
This means you’ll need to use software to view the final income tax estimate calculated by HMRC, which includes details of all the income, expenses and allowances you’ve told them about.
You’ll then need to legally declare – via the Final Declaration – that you’ve provided HMRC with all the information it requested and that you agree with its income tax calculation.
The Final Declaration applies to individuals, and not to individual businesses and/or property income, so you’ll only submit one each accounting period.
2. When does MTD for Income Tax start?
Landlords and sole traders will have to follow the MTD for Income Tax rules in their first full accounting period starting on or after 6 April 2023 if their annual business and/or property income is above £10,000.
In other words, most sole traders will need to follow MTD for Income Tax rules starting with the tax year 2023/24, and all subsequent trading years.
Even though you’ve signed up for MTD for Income Tax, unless you are already part of the MTD for Income Tax pilot and have submitted quarterly updates, EOPS, and a Final Declaration, you’ll still need to submit a Self Assessment tax return for the 2022/23 tax year by 31 January 2024 (or 30 December 2023 if you want HMRC to collect taxes due from wages and pensions via PAYE).
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3. Who is affected by MTD for Income Tax?
Businesses and landlords that have a taxable income over £10,000 are impacted by MTD for Income Tax.
Those whose business income is below this threshold or those who complete Self Assessment for other reasons – such as for state benefits, pension income, or savings interest – will probably see no changes.
4. Will I still be able to file paper Self Assessment returns under MTD for Income Tax?
If your income is below £10,000, the MTD for Income Tax regulations do not apply to you. It’s likely you’ll be able to continue filing your Self Assessment return in the same way as usual.
While most businesses required to follow the MTD for Income Tax rules will have to use compatible software, some can apply to be digitally excluded.
This is allowed because it’s either impossible or impractical for them to use technology in the way MTD requires.
Examples include those who don’t have internet access because of their remote location. Some disabilities make using technology difficult or impossible.
Some religions prohibit the use of technology in the way MTD demands. HMRC considers these valid reasons for exemption, and there are other circumstances too.
However, these really are exceptions and will apply to only a few. Additionally, it’s likely those wishing to become digitally exempt for what HMRC consider legitimate reasons will have to apply to HMRC directly and explain why.
5. Can I opt-out of MTD for Income Tax?
MTD for Income Tax is not optional if you fall within its scope (that is, you operate a business or are a landlord with an income over £10,000).
In other words, you can’t simply choose not to take part.
But it’s possible to apply to be digitally excluded if you have a good reason – see “Will I still be able to file paper Self Assessment returns under MTD for Income Tax?” above.
6. What software do I need for MTD for Income Tax?
You’ll need to use MTD for Income Tax-compatible software to store your digital records, send the required information to HMRC, view HMRC’s estimate of the final tax bill and send a final declaration to “crystallise” your income tax.
For most businesses and landlords, this will be some form of accounting software.
You can expect that most cloud-based small business accounting software to be updated in time for MTD for Income Tax.
If you use traditional desktop software, you’ll need to ensure it’s updated in time for MTD for Income Tax or investigate how to integrate it with bridging software, so any gaps in the digital journey are covered.
You may find some older software simply won’t be updated, so you might need to change to a newer package or software provider.
You should allow time for this to take place well ahead of the 6 April 2023 implementation date.
If you use a spreadsheet for your accounting, see “Can I use spreadsheets for MTD for Income Tax?” below.
7. Is Self Assessment ending because of MTD for Income Tax?
No. For those who are required to use MTD for Income Tax, the Final Declaration replaces the need to file a Self Assessment return.
However, for everybody else required to file a Self Assessment return and who are outside the scope of MTD for Income Tax, there will be no change. Self Assessment will continue to be used.
This includes not only those declaring income – for example, interest on savings – but also those who claim certain tax reliefs or benefits, or make charity donations even though they have no income outside of their salaried employment and where all income tax is paid by their employer through PAYE.
8. How will I do my accounting with MTD for Income Tax?
The majority of your daily accounting will not change and you should continue to record income and expenses.
However, the following changes to how businesses and landlords do their accounting will be necessary once they sign up for MTD for Income Tax:
As part of MTD for Income Tax, you’re likely to need to keep some information in digital format. HMRC will provide specific guidance on this later but for most businesses, it’s likely to include information about all sales invoices/rental agreements, purchase invoices, and other income and expenses.
There may be different rules if you’re registered for VAT schemes, such as the flat rate scheme, where HMRC already lets businesses keep less information under the MTD for VAT rules.
At least four updates per year
After signing up for MTD for Income Tax, every three months you’ll have to use software to calculate and send summary details about your income and expenditure to HMRC as a Quarterly Update.
The MTD for VAT rules require that the update is calculated automatically based on the digital records (HMRC calls this a “Digital Journey”) and a similar requirement is probable for MTD for Income Tax.
HMRC has recognised that your digital records may be incomplete and may not include allowances and adjustments that your accountant may recommend at year-end.
In other words, the MTD for Income Tax rules require those within its scope send a quarterly update – but they do not require that the update needs to be accurate. Any corrections or changes can be made at a later date or as part of the EOPS.
If you want an updated estimate of your income tax, you can send in updates as often as you want, and HMRC will update its calculation of your income tax after each update.
End of Period Statement (EOPS)
At the end of each accounting period (i.e. your tax year for each business), you may want to claim additional allowances or make adjustments.
You need to tell HMRC about any such changes, along with your final income and expenses.
As with the quarterly updates, it’s likely this will need to be based on digital records and follow a Digital Journey to create the EOPS.
You’ll need to send HMRC a separate EOPS for each business you operate and also for any income you receive from property rental. It’s likely that software will automate this for you.
At the end of your accounting period, you’ll need to send HMRC a final declaration using compatible software.
This is a single declaration that basically informs HMRC you have told it everything it needs to know about all your income from self-employed businesses and property rental, so it can calculate a final tax liability.
Tax professionals often call this “crystallising” your tax liability.
End of Self Assessment requirements
Because of the above, for taxpayers who follow the MTD for Income Tax rules, and don’t need to tell HMRC about any income, expenses or allowances for other areas, there will no longer be any need to submit a Self Assessment tax return for the tax years that follow 6 April 2023.
But you’ll still need to submit them for tax years prior to this unless you are part of the MTD for Income Tax Pilot.
9. What’s the MTD for Income Tax pilot?
HMRC is running an optional pilot programme that you can sign up to in order to take part in MTD for Income Tax between now and its mandation in April 2023.
As with other HMRC pilots, there are limits on who can join. But as we get closer to the date of mandation for MTD for Income Tax, we can expect some of the limitations to be relaxed.
For now, the pilot is limited to UK residents who are registered for Self Assessment, and who are either sole traders with income from only one business or landlords who rent out UK property (or both).
If you have income from any other sources or taxable payments you make or claim tax relief on then, again, you can’t sign up for the pilot.
You’ll need software compatible with the MTD for Income Tax pilot programme. Currently, there are only a few examples. This should change as we approach April 2023.
10. Is MTD for Income Tax delayed?
MTD for Income Tax will become law on 6 April 2023 and no delays have been announced at the time of writing.
The media and accountants sometimes talk of MTD for Income Tax being delayed. This is because the government mentioned it intended to implement it before MTD for VAT became law, and then said it would be implemented shortly after.
However, because of issues such as Brexit and the coronavirus (COVID-19) disruption, this did not happen.
11. What will the MTD for Income Tax deadlines be?
You’ll need to submit Quarterly Updates, EOPS and a Final Declaration based on your accounting year.
The EOPS for a business’ given accounting year will need to be submitted by 31 January following the tax year, as with Self Assessment. This date is the deadline, and it’s advised to submit this sooner.
The Final Declaration also has a deadline of 31 January.
You’ll still need to pay your income tax by 31 January of the following year. If you’re required to make a payment on account for the current year, this will need to be made by 31 July.
12. Is there free software for MTD for Income Tax?
The government has said it expects there will be “free software for businesses with the simplest tax affairs” available in time for MTD for Income Tax. This should be used for the first full accounting period following 6 April 2023.
Notably, no free software was made available for MTD for VAT.
The government considers the purchase of compatible VAT accounting software to be a legitimate business expense that businesses are expected to pay. Nonetheless, some vendors and financial institutions offer free software.
13. What’s the MTD for Income Tax threshold?
MTD for Income Tax applies only to self-employed businesses’ income and/or property income of more than £10,000.
14. Can I use spreadsheets for MTD for Income Tax?
It’s not yet clear if the use of spreadsheets will be allowed for businesses and landlords that fall within the scope of MTD for Income Tax.
However, the existing rules for MTD for VAT might provide a clue.
The use of spreadsheets is allowed, although there are complicated rules around the cutting/copying and pasting of data, which falls under the digital linking legislation.
In short, while spreadsheets can be used for MTD, care must be taken. It’s very easy to accidentally break the law.
Those using a spreadsheet for MTD for VAT require bridging software to file their returns with HMRC. This is available from software vendors.
Again, it’s not yet clear if the same setup will be possible with MTD for Income Tax to make the three-monthly updates, as well as the Final Declaration every year.
15. Where can I learn more about MTD for Income Tax?
The government’s overview of Making Tax Digital contains higher-level information about the government’s plans.
We’ll share more details on Sage Advice whenever any new information becomes available, including guidance on how to comply.
16. When will MTD for Corporation Tax start?
The government has not yet set a start date for Making Tax Digital for Corporation Tax. It’ll probably follow the introduction of MTD for Income Tax, so is unlikely to arrive until 2023 at the earliest.
As part of the government roadmap that announced the MTD for Income Tax start date, it was mentioned that it’s actively consulting with businesses about MTD for Corporation Tax.
Conclusion on MTD for Income Tax
Although MTD for Income Tax might seem a distance away, you need to start planning now.
Depending on the nature of your income, the new rules might change how you keep your accounting records, and how you communicate with HMRC.
You should speak to your accountant, if you have one, to get advice, and see what changes they’re planning and implementing.
If you use cloud accounting software, the good news is you almost certainly already meet the required criteria for digital record-keeping – and feature updates for EOPS and the Final Declaration are likely to arrive well in time for the MTD for Income Tax mandation date.
It’s possible all you’ll need to do for the 2023/24 tax year is use the features that exist within your accounting software.
However, if you use spreadsheets, paper or a desktop accounting software package for your accounting, you’ll need to start making preparations sooner rather than later.
Switching to a cloud accounting package should be done sooner rather than later because that’ll give you time to become at ease with improved accounting processes well in time for the MTD for Income Tax start date.
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