MTD for Income Tax Self Assessment (ITSA)
As of 6 April 2024 most self employed traders and private landlords will be required to comply with HMRC’s new MTD for ITSA rules.
Who is required to comply?
All individuals who are subject to income tax on the profits of a trade, profession, vocation or property business who have a total turnover from all such activities in excess of £10,000 will be required to comply with the new rules from 6 April 2024.
The £10,000 limit relates to turnover, rather than to profit. Therefore you will still be required to register when you have a profit of £2,000, if the gross income of that business exceeds £10,000.
The £10,000 limit is the aggregate threshold for the income from all your businesses. If, for instance, you have rental income of £6,000 and sole trade income of £4,001, you will be required to comply with the rules. Whereas, if you have rental income of £9,999 and no other self employed earnings you will not be required to comply.
Simple partnership, where all partners are natural individuals, will be required to comply from 6 April 2025, and more complex structures will be brought on board at a later point.
Quarterly reporting
Relevant individuals will be required to keep their accounting records electronically (either using suitable software, or a spreadsheet) and file quarterly returns to HMRC with details of their income and expenditure.
Adjustments for tax such as accruals, depreciation and capital allowances will not be required on the quarterly reports, nor will copies of invoices be required to be linked electronically to the submissions.
The quarters are prescribed by HMRC and end on 5 July, 5 October, 5 January and 5 April.
Period covered Filing Deadline
Quarterly update 1 6 April to 5 July 5 August
Quarterly update 2 6 July to 5 October 5 November
Quarterly update 3 6 October to 5 January 5 February
Quarterly update 4 6 January to 5 April 5 May
Alternatively the taxpayer has the option to choose the following quarter end dates:
Period covered Filing Deadline
Quarterly update 1 1 April to 30 June 5 August
Quarterly update 2 1 July to 30 September 5 November
Quarterly update 3 1 October to 31 December 5 February
Quarterly update 4 1 January to 31 March 5 May
You will note that the filing deadlines for each quarter are the same irrespective of whether the month end date is chosen. One quarterly return will be required for each businesses.
EOPS – End of Period Statement
Further to the above quarterly returns, the taxpayer will be required to complete an End of Period Statement (EOPS) which should finalise the business profits. The EOPS will include accounting adjustments like accruals and prepayments, stock and capital allowances claims. One EOPS will be required for each separate business.
Final Declaration
Once all business matters are concluded with the EOPS, a further ‘Final declaration’ will be needed to bring together all the business and personal information necessary to determine your personal tax liability. This will be due by the normal self-assessment deadline of 31 January.
HMRC claim that many taxpayers who solely have property income in additional to employment income and or pension income are likely to fall out of self-assessment.
Payments
Although the frequency of reporting is to change, the timing of tax payments will not and the current system of payments to account and balancing payments by 31 January after the tax year is expected to continue.
Penalties
A new penalty regime has been introduced by Finance Act 2021 and it will apply to MTD for VAT and ITSA.
Late Filing
A points-based system will be operated, where a default or late submission will give rise to one penalty point. When a certain number of points have been amassed, a penalty charge will arise of £200 – the threshold for this charge will depend on the return in question – for instance quarterly returns will have a threshold of 4 points before a charge is issued, whereas the EOPS will have a threshold of only 2 points.
Points can be erased from your record after a period of ‘compliance, with the length of the compliance period varying in line with the original paperwork in default.
Late Payment
A new late payment penalty regime has also been designed. Penalties will not be charged for payments late by up to 15 days, but anything overdue after this date will be penalised at a rate of 2%, with a further 2% payable after the 30 day point. A further 4% per annum charge is applied to any sums unpaid after 30 days. Penalties can be suspended if a time to pay arrangement is agreed.
What do you need to do to prepare?
• If your VAT quarters are not in line with the new MTD for ITSA quarters then it would be worthwhile realigning them before 6 April 2024.
• If you are not currently using an electronic bookkeeping system consider how you are going to comply with the new rules. There is a wide variety of bookkeeping software available and HMRC assure us that free software will be made available before the deadline. There is also the option of maintaining your records on a spreadsheet and using a VAT filer tool to submit them to HMRC. If you are unsure of which route is best for you and your business please get in touch with us so that we can help guide you.
• Register for MTD for ITSA – this can’t be done as yet, but we will issue a newsletter as soon as registration is possible to ensure that all affected clients are ready for the deadline.
Is anyone exempt from MTD for ITSA?
If any of the following apply then you may be able to claim an exemption from MTD for Income Tax rules:
• It’s not reasonably practicable for you to use digital tools to keep your records or submit quarterly returns due to age, disability, remoteness of location or any other reason.
• You are subject to insolvency proceedings.
• Your business is run entirely by practicing members of a religious society or order whose beliefs are incompatible with using electronic communications or keeping electronic records.
Summary
We are going from a system whereby one annual report is required for many small businesses – that being their personal tax return – to a system whereby 5 different reports need to be filed in a year in respect of each business interest, with a sixth submission also required annually to bring all the relevant information together.
It is likely, considering quarterly returns do not require accounting adjustments, that these can all be returned by the individual personally, without too much input being required from accountants. The EOPS and Final Declaration are both likely to require the assistance of your usual accountancy firm. The amount of time and money spent on compliance is likely to be higher than prior to the introduction of these rules. It is very important therefore, that you choose your software and accountancy support package wisely to ensure that you are not suffering undue headaches from compliance and that you are not paying too much in fees or software costs.
On another matter….
I am starting the ‘Church of the Digitally Disenchanted’. All are welcome who worship the good book – by which I mean anything written on paper and capable of being dog-eared.
