Making Tax Digital For Income Tax - July 29th 2024

Getting in early for Making Tax Digital

HMRC is on track to meet the April 2026 delivery date when Making Tax Digital (MTD) will be mandated for the first tranche of self-employed taxpayers. Although you may be tempted to put off setting up new working practices, there could be some advantages in joining early.

Phase one users

Self-employed taxpayers and landlords will have to use MTD from April 2026 if their turnover exceeds £50,000. Only self-employment income and rental income is included for this purpose, with income from other sources – such as employment income, partnership income and investment income – ignored.

Although April 2026 might seem some way off, it will in fact be income for the current 2024/25 tax year that determines whether or not you breach the £50,000 limit. HMRC will check the income reported on your 2024/25 self-assessment tax return.

Taxpayers with income of between £30,000 and £50,000 will not be mandated until April 2027. Although free to join early, they might prefer to wait a year.

Some caveats

The pilot scheme is live again after pausing in 2023, but it comes with some warnings, including:

There is currently little MTD software available; just six suppliers to choose from, including two free offerings.
Anyone using spreadsheets for record keeping will probably want to wait for bridging software to become available so that the spreadsheets can be linked directly with HMRC’s systems.
The new late filing penalty regime will immediately apply.

Some taxpayers falling into the correct income bracket are currently excluded from joining the pilot scheme, for example, partners in a partnership, those with jointly owned property or those claiming the married couple’s allowance. If any of these criteria affect you, it’s a good time to plan for when the pilot becomes more widely available next year.

Advantages

One obvious advantage of joining MTD early is that users will get the chance to test a full cycle of submissions before MTD becomes mandatory. Early users will receive considerably more support during testing than those who are subsequently mandated.

Early adopters will have access to a dedicated HMRC support team, with this team not limited to just dealing with MTD-related queries.
They will also deal with wider self-assessment issues, so the wait times common with HMRC helplines can be avoided.

Participants need to send quarterly updates within a month of each quarter end, so you need to make sure your records are up to date. This should, of course, not be an issue given the requirement to keep records digitally.

Click here if you would like to sign up.

Information in Quarterly MTD for Income Tax Reports

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

Business income - Business expenses - allowable and disallowable
Turnover/gross rents, rates, power and insurance costs
Repairs and mantainance of property and equipment
Costs of goods bought for resale or goods used
Accountancy, legal and other professional fees
Bank, credit card and other financial charges
Phone, fax, stationery and other office costs
Wages,salaries and other staff costs
Interest on bank and other loans
Business entertainment costs
Car, van and travel expenses
Other business expenses
Consolidated expenses
Sub-contractor costs
Advertising

Timing of MTD for income Tax Reports

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).

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.