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Making Tax Digital

The journey down HMRC’s long road to Making Tax Digital (MTD) continues with income tax following VAT along the way. Making Tax Digital for income tax self assessment (MTD ITSA) is now being phased in; the first returns under the new rules are due to be made in 2024. MTD for VAT (MTDfV) already applies to all VAT-registered businesses. Here we take a look at what the MTD rules mean in practice.

How does MTD apply?

HMRC research suggests many people are unsure which developments apply to them. So, what are the rules on records and software?

MTD involves keeping and preserving specific accounting records in a prescribed digital format and transmitting information to HMRC digitally. It does not mean having to scan and store receipts and invoices digitally, as originally envisaged.

MTD rules require what is called functional compatible software for record keeping purposes. To make submissions to HMRC, the software is linked with HMRC systems, and there is a specific authorisation process at the outset (and every 18 months afterwards) to do this.

The rules require an uninterrupted digital journey to HMRC, information flowing from the accounting records to the digital filing, without manual input.

Spreadsheets can form a component part of digital record keeping, provided that the product that consolidates records or summary records from the spreadsheet is digital.

MTDfV so far

All VAT-registered businesses should now be using MTDfV, whether businesses with taxable turnover over the VAT registration threshold of £85,000, or those operating under this level. 

From 1 November 2022, the online VAT return facility will close. For businesses filing annual VAT returns, the last date to file the old way is 15 May 2023.

What’s next for MTD ITSA?

The MTD ITSA rules will apply from the start of the 2024/25 tax year to individuals who are registered for self assessment and either self-employed or collecting property income before 6 April 2023 with qualifying income over £10,000.

HMRC anticipates checking self assessment tax returns for 2022/23 (submitted by 31 January 2024) on a case-by-case basis to assess whether qualifying income is such that the MTD ITSA regime will apply. It then intends to write to taxpayers confirming they are within MTD ITSA. 

If you are in partnership, or become a landlord or sole trader after 6 April 2023, different dates apply. 

General partnerships (those with only individuals as partners, and not for example, corporate partners) enter MTD ITSA from 6 April 2025, if qualifying partnership income is more than £10,000.

Exemptions from MTD

There are very few circumstances where HMRC will grant an exemption from MTD for VAT or ITSA. HMRC defines digital exclusion as where there are religious beliefs incompatible with the use of digital technology, or where a business is subject to an insolvency procedure.

In the case of MTD for ITSA there are also exclusions for trustees of charitable trusts and non-registered pension schemes, personal representatives of someone who has died, Lloyd’s of London members, in relation to their underwriting businesses, and non-resident companies.

Appropriate software

Appropriate functional compatible software must be used for all business income and expenses. For retail sales, digital records mean a single digital record of the daily gross takings.

The penalty regime

New penalty rules are being introduced for late submission and late payment. They apply initially to VAT, for VAT periods beginning on or after 1 January 2023. They then roll out to MTD ITSA from 6 April 2024, and to other ITSA cases from 6 April 2025. The essence of the change is that instead of an automatic financial penalty for failure to submit on time, penalty points accrue. When a particular points threshold is reached, a penalty arises.

How we can help

HMRC’s MTD project continues with further changes and updates expected. We will keep you updated.

If you want to know more about MTD for ITSA or wish to start preparing for the digital journey ahead, please contact us. We can help you comply with HMRC’s requirements, select the right software and prepare for the changes to come.