Making tax digital (or MTD) is HMRC’s plan to simplify tax reporting, reduce errors, and is another step towards more real-time reporting.

MTD is already up and running for VAT, and will be expanded to all VAT registered businesses from April 2022.

Under MTD, records must be kept electronically. This includes specific rules about how records should be kept, how records kept in different software should be linked, and how data should be transferred from one software to another. This is to reduce the risk of error arising through incorrect data entry. The return submissions need to be done through software which is compatible with HMRC’s system, or through a spreadsheet linked to HMRC through suitable “bridging software”.

HMRC have been planning to bring in MTD for Income Tax Self-Assessment (ITSA) for a while. This was finally due to be introduced from April 2023, but in late 2021 the start date was pushed back to April 2024, due to the pressure that businesses have been under through Covid-19.

MTD ITSA will initially apply to individuals who have total property and/or self-employed income of more than £10,000 (gross income, not profit). This figure is adjusted pro-rata for accounting periods of less than a year. There will be a limited exemption for the “digitally excluded” – this means that it is not reasonable or practical for the individual to use computers or they object on religious grounds. This exemption must be requested by writing to HMRC.

MTD ITSA will replace the need for a Self-Assessment tax return, and will comprise multiple reporting points, all submitted using MTD compliant software:

Quarterly updates: electronic submission of summary self-employment and/or property income and expenses to HMRC. Reporting can be based on “tax quarters” (quarters to 5 April, 5 July etc.) or, by election, for calendar quarters. The quarterly filing deadlines will be just one month after the tax quarter end: 5 August, 5 November, 5 February, and 5 May.  This is a very short deadline and information submitted will need to be as accurate as possible. Taxpayers within MTD will need to keep their business records regularly up to date and near to “live” in order to meet the deadline.

End of Period Statement (EOPS): One EOPS is required for each income source. In the EOPS, you will make any year end accounting adjustments. The deadline is 31 January following the tax year end.

Final declaration: this will take account of any personal income (e.g. interest, dividends) and claims for reliefs. This effectively replaces the Self-Assessment tax return and again, the deadline 31 January following tax year end.

Taxpayers will be required to keep line-by-line data in a software, which can be a spreadsheet or a more sophisticated bookkeeping software. The record-keeping rules for MTD ITSA will follow the rules for MTD for VAT. Certain allowances are made, for example HMRC allow daily takings to be typed into software if it is not possible to link directly. Whether income and expense data are generated from software (e.g. sales software) or manually entered into a software, “digital links” must be maintained from that point until the data is submitted to HMRC. Digital links are data links requiring no manual intervention, for example direct software links such as an API or linking data in spreadsheet cells. HMRC’s VAT MTD guidance (click here) provides detail and a number of examples illustrating the concept of digital record keeping and digital links.

While line by line data must be kept electronically, only the totals are currently required to be submitted to HMRC so there is no change to the amount of information HMRC will see.

Even though 2024 seems like a long way away, it is going to be a big change for many self-employed individuals and landlords, and the tight reporting deadlines will be challenging. If you think you may fall within the rules, prepare early and ensure systems are running smoothly before 2024. Speak to your Barnes Roffe contact if you need advice to help you plan for MTD ITSA.