Making Tax Digital (MTD) for Income Tax & Self-Assessment (ITSA) delay

Making Tax Digital for Income Tax & Self-Assessment which was due to be introduced in April 2023, has been postponed until April 2024.

What does this mean for you?

Although there has been a delay, the regulations confirm that MTD ITSA will be implemented from April 2024.  This requires sole traders, partnerships and landlords with an annual business or property income which is liable to income tax, above £10,000, to make quarterly reports to HMRC using compatible software.

MTD for ITSA will commence for all businesses within the scope, in the tax year 2024/25 regardless of the accounting date.

Partnerships are not required to join MTD ITSA until the 2025/26 tax year, with more complex partnerships joining at a later date, to be confirmed.

New businesses will be required to join MTD ITSA from the April after they file their first self-assessment tax return.

Any business within the scope of MTD will need to keep digital records and use compatible software to make quarterly updates to HMRC.  Irrespective of accounting periods, everyone will be required to file to the same quarter dates, to 5 April, July, October and January with an option to elect to report to 31 March, 30 June, 30 September and 31 December.

An end of period statement (EOPS) will finalise the reporting for each income source, this is equivalent to the self-employment and property pages on the self-assessment tax return.

Penalties

A new system of penalties for late filing and late payment of tax is being introduced alongside MTD.  The ministerial statement confirms that the start date for this is also delayed until the 2024/25 tax year for those mandated for MTD ISA from that date and from 2025/26 for all other ITSA taxpayers.

Exemptions

 In line with the exemptions for MTD VAT, individuals should not have to follow the MTD for Income tax rules if any of the following apply:

  • It is not reasonably practicable for them to use digital tools to keep their business records or submit quarterly returns due to age, disability, remoteness of locations or any other reason (often referred to as ‘digital exclusion’)
  • If subject to an insolvency procedure.
  • The business is run entirely by practising members of a religious society or order whose beliefs are incompatible with using electronic communications or keeping electronic records.

Where any of the above apply, the individual has to apply to HMRC to claim an exemption, with HMRC having 28 days to either grant or deny the application.

We understand that where a business has already qualified for an exemption from MTD for VAT, they will also be exempt from MTD for Income tax.

Other exemptions

The following are also exempt from MTD for ITSA:

  • Non-resident companies
  • Trustees, executors and administrators
  • Foreign businesses of non-UK domiciled individuals

Basis Period Reform

A basis period is the time period for which a sole trader or partnership pays tax each year.

The government is proposing to reform the income tax basis period system for unincorporated businesses by moving from the current year basis to a tax year basis.  This will not be introduced until the start of MTD in 2024/25, with 2023/24 being the transitional year.  For each tax year, the profits to be assessed will then be those arising during that year.  It is proposed that any excess tax change arising in the transitional year can be paid over five years.

An announcement on whether basis period reform will go ahead is expected in the Budget on 27 October.