Making Tax Digital for Income Tax Self Assessment – MTD ITSA

John Edwards, CEO of the Institute of Financial Accountants (IFA), provides an overview of the Making Tax Digital for Income Tax (MTD ITSA) changes due to come into force in April 2024 and urges accountants to prepare now.

 Heralded as a £360m revenue opportunity, Making Tax Digital for Income Tax (MTD ITSA) is part of a 10-year plan to modernise the tax administration system.

There are two interlocking sections to MTD: one is the data provided by taxpayers and the other is the processing of that data by HMRC to produce a tax liability, penalty or interest – sometimes all three.

What does MTD ITSA mean for taxpayers?

Anyone making more over £10,000 per year in gross income from self-employment or real estate is subject to the MTD ITSA. It entails converting their accounting records into a digital format and digitally capturing transactional data, most commonly on a spreadsheet.

Processing the data without manual involvement is the second MTD criterion. According to HMRC, removing “human hands” from the process of processing accounting data removes mistakes like incorrectly written numbers, data placed into the wrong field, and transactions altogether removed from the accounting records.

What are the benefits of MTD?

According to HMRC, recently published research on the small business experience of MTD for VAT shows that digitalising accounting systems will bring efficiency benefits for businesses, in part by helping taxpayers reduce common mistakes in their tax returns, which cost the Exchequer over £10bn in lost revenue in 2019-2020.

Other anticipated advantages include lowering the cost of gathering and processing tax data, closing the tax gap, and improving the adaptability and resilience of the tax compliance system’s operational components.

 Who comes into MTD and when?

Since 2019, MTD is gradually being introduced tax by tax, not by business type or structure, as shown in the below timeline of its phased rollout:

MTD reports for periods starting on and after:  

Applies to businesses which are:

1 October 2019 for VAT

VAT-registered with turnover over £85,000 who were deferred

1 April 2022 for VAT  

VAT-registered with any level of turnover

6 April 2024 for income tax

Sole-traders and/or landlords with turnover over £10,000

6 April 2025 for income tax

General partnerships with turnover over £10,000

To be advised for income tax

Complex partnerships; LLPs and partnerships with corporate members with turnover over £10,000

Not earlier than 1 April 2026 for corporation tax 

Companies and all bodies that pay corporation tax

How does MTD reporting work?

The business or trader will need to keep digital records and use suitable software to provide quarterly updates, end-of-year adjustments, and the final confirmation because there are different MTD reporting requirements for different taxes. Then, this is divided into two sections: controlling the internal process and the client-facing tools.

Client-facing tools

Given that a typical accountancy firm is likely to have many sole traders and landlords that meet the £10,000 revenue level, the client-facing tools chosen may have to cover a broad range of abilities – and attitudes – to bookkeeping and technology.

It’s important for a practice or accountant to consider a range of options as they may need to be able to offer more than one. Accountants know their clients best, and while some businesses may be fine with snapping receipts and basic coding, others might find it easier to hook their bank accounts to something that will do most of the initial work for them.

The internal process

A crucial component of how the practise side will be managed should be making sure that data can be easily examined, fixed, and filed.

Many of the client-facing solutions will offer a dashboard of some sort, providing a ‘helicopter view’ of what is going on so that it is possible to dive in where required. Others provide integrations with bookkeeping or even directly into their tax software.

Finding a ‘tech mix’ that works for accountants requires both to be in balance and minimise the amount of moving between one system and another.

Will taxpayers already know about MTD ITSA?

Keeping up to date with the legislation to understand how MTD ITSA will impact the kinds of clients a firm has, is essential. This is particularly relevant in areas where clarification is still to come, for example, filing for multiple sources of income and landlords with shared ownership of properties.

Although there is no hard deadline, HMRC has suggested that the technical details will be available at some point soon and is currently conducting a pilot scheme for some businesses.

Regardless, clients will need to know if they are impacted and how. It’s going to be a big change and the more warning given, the better. Although HMRC has committed to a communication strategy, relying on the key information getting through might not be wise. In fact, it is better if it comes from their trusted accountant first if possible, even if it’s just the basics at this stage.

‘Solving MTD’ together

Technology in itself is not going to solve MTD ITSA for any individual or firm, but it is a mandatory component.

While it seems like there is a long way to go until April 2024, it’s best to start thinking about it now, if you’ve not done so already, as accountants and bookkeepers will be pivotal in ensuring that the Making Tax Digital for ITSA rollout goes to plan, in the same way as MTD VAT.

Making Tax Digital for Income Tax Self Assessment MTD ITSA


Making Tax Digital for Income Tax Self Assessment MTD ITSA

Our service to you

If you are a self employed, business owner/director of company looking to get your accountancy and taxation matters sorted, look no further. We, at Naail & Co, are pro-active and easily accessible accountants and tax advisors, who will not only ensure that all your filing obligations are up to date with Companies House and HMRC, but also you do not pay a penny more in taxes than you have to. We work on a fixed fee basis and provide same day response to all your phone and email enquiries. We will also allocate a designated accounts manager who would have better understanding of your and business financial and taxation affairs. Book a free consultation call using the link below.

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