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Making Tax Digital For Income Tax - December 24th 2022

Making Tax Digital for Income Tax Delayed until April 2026

From April 2026, self-employed individuals and landlords with an income of more than £50,000 will be required to keep digital records and provide quarterly updates on their income and expenditure to HMRC through MTD-compatible software.

Making Tax Digital (MTD) is a government initiative to modernise HMRC’s tax system, with the aim of making the whole process of administrating tax simpler and more efficient. All of your tax information will be in one place (your digital account) and you will be able to pay tax based on your business activity during the year. You can upload and update your tax account in real time.

Making Tax Digital from April 2027

Those with an income of between £30,000 and £50,000 will need to do this from April 2027. Most customers will be able to join voluntarily beforehand, meaning they can eliminate common errors and save time managing their tax affairs.

Income below the £30,000 threshold

The government has also announced a review into the needs of smaller businesses, particularly those under the £30,000 income threshold. The review will consider how MTD for ITSA can be shaped to meet the needs of these smaller businesses and the best way for them to fulfil their Income Tax obligations. It will also inform the approach for any further rollout of MTD for ITSA7 after April 2027.

Mandating of MTD for ITSA will not be extended to general partnerships in 2025 as previously announced.

Will it affect me?

If you own a business, you are self-employed and you pay income tax, national insurance, VAT or corporation tax, then it is quite likely you will be affected. This means you could be required to keep track of your tax affairs digitally using MTD compatible software, and to update HMRC at least quarterly via your digital tax account. Eventually this will abolish the annual tax return. This will be the law and there will be penalties for non-compliance

When is all this happening?

The mandatory use of software for Making Tax Digital for Income Tax Self-Assessment is being phased in from April 2026.

Making Tax Digital (MTD) for Income Tax Self-Assessment (ITSA) was due to be phased in from April 2024. However, the government, recognising the current economic environment and the significant change that a transition to Making Tax Digital represents, has pushed this back to April 2026. In addition, the previously announced £10,000 threshold for self-employment and property income has been raised, as detailed below.

Under MTD for ITSA, businesses, self-employed individuals, and landlords will keep digital records, and send a quarterly summary of their business income and expenses to HMRC using MTD-compatible software. In response, they will receive an estimated tax calculation based on the information provided to help them budget for their tax. At the end of the year, they can add any non-business information and finalise their tax affairs. This will replace the need for a Self-Assessment tax return.

The Government is running a pilot scheme where businesses can use the online service for Making Tax Digital for Income Tax. Click here if you would like to sign up.

Information in Quarterly MTD for Income Tax Reports

The precise details of what needs to be reported each quarter have yet to be finalised, but the categories of income and expenditure are likely to be the same as currently reported for self-assessment.

The accounting software will need to record income and expenditure into the following main categories:

  • Turnover/gross rents
  • Costs of goods sold
  • Materials
  • Wages and salaries of employees
  • Sub-contractor costs
  • Rent, rates, power, insurance
  • Repairs and renewals
  • Professional fees
  • Telephone and other office costs
  • Interest on bank and other loans
  • Motor and travel expenses

HMRC also propose that those businesses with turnover below the £85,000 VAT threshold will only need to report the totals of income and expenditure each quarter which will be a welcome simplification for small businesses.

Timing of MTD for income Tax Reports

It is currently proposed that there will be 4 quarterly reports to HMRC followed by a finalisation return when end of year adjustments will be made. All businesses within MTD for Income Tax will have to provide quarterly updates of their income and expenses made up to:

  • Quarterly Update 1  - 5 July (Filing Deadline 5 August)
  • Quarterly Update 2  - 5 October (Filing Deadline 5 November)
  • Quarterly Update 3  - 5 January (Filing Deadline 5 February)
  • Quarterly Update 4  - 5 April (Filing Deadline 5 May)

Alternatively businesses can make a 'calendar quarter election' which allows them to draw up quarterly updates to the end of the previous month.  Where this election is made, the quarterly updates will be as follows:

  • Quarterly Update 1  - 30 June (Filing Deadline 5 August)
  • Quarterly Update 2  - 30 September (Filing Deadline 5 November)
  • Quarterly Update 3  - 31 December (Filing Deadline 5 February)
  • Quarterly Update 4  - 31 March (Filing Deadline 5 May)

The first quarterly updates under MTD for ITSA will therefore be due for filing by 5 August 2026, and will cover either the quarter ended 5 July 2026, or 30 June 2026 (where a calendar quarter election is in place).

End of Period Statement

Alongside the quarterly reports, you'll need to send an End of Period Statement (EOPS) and a Final Declaration by January 31st following the tax year.

Your quarterly updates should contain details of your income and expenses.

In your EOPS, you need to make any final adjustments to your accounting, claim reliefs, and confirm all information is complete and correct.  A separate EOPS will be required for each trade or property business carried on by an individual.

The Final Declaration is where you submit relief claims and declare any additional income such as savings and investment income.

Abolition of Basis Periods and New Tax Year End

We are awaiting further information on MTD from HMRC regarding the consultation to abolish basis periods for unincorporated businesses to simplify MTD reporting. These changes will not come into effect before April 2026, with a transition year not coming into effect earlier than 2025.

That change would apply to sole traders, partnerships, as well as trusts with trading and property rental income. There would also be complicated transitional rules which could result in a big tax bill that year for some traders.

The Treasury are also consulting on changing the tax year itself from the archaic 5 April year end to 31 March or even 31 December. A calendar tax year would bring the UK into line with most other countries at last!

We will keep you updated when more information comes available.

What should I do about MTD?

Talk to us - the good news is that you can reduce your running costs and streamline your accounting by complying with the new rules!

In the last two years we have worked with many other clients to help them comply with MTD and streamline the way they do things.

Just suppose you had a system where your bank feeds your data directly into your accounts on a DAILY basis, you take a photo on your phone of a purchase invoice and it is posted automatically, you can see your results, who owes you money, who you owe and your business bank balance 24/7, 365 days a year from your smart phone.

We have MTD compliant Cloud accounting packages that give you:

  • A clear picture of your current financial position, in real-time
  • Automatic updates that mean you can spend more time doing what you enjoy
  • Your accounts are 100% online, so there’s no software to install and everything is backed up automatically. Updates are free and instantly available

There are a number of MTD compliant accounting software packages that you might wish to consider and we can of course advise you on the one that is most appropriate for your business. There are even relatively cheap software packages specifically designed for property rental businesses.

There is still no set date for mandating Making Tax Digital (MTD) for corporation tax although it is not expected until 2026 at the earliest. HMRC have committed to providing sufficient notice of implementation following any decision to mandate MTD for corporation tax to allow businesses time to prepare.

Like MTD for corporation tax many of the proposed changes are several years away from implementation and we will keep you updated if and when the changes are introduced.

Please contact us about helping you to comply with the new rules. We are cloud accounting specialists, and we can train and support you with the right software.