Introduction
The Making Tax Digital Income Tax Self-Assessment (MTD ITSA) legislation will apply to all sole trader businesses and landlord’s whose turnover is more than £10,000. The definition of turnover is amount received before applying expenses. If an individual has a trade and a rental property, they are required to add the turnover from each of these sources together to determine whether the threshold has been breached.
What do I have to do?
Where a taxpayer falls into the MTD ITSA regime, they will need to keep digital records and submit quarterly reports to HMRC showing a summary of their income and expenses in that period. Also, there will be a requirement to complete a year-end reconciliation which broadly equates to the current self-assessment tax return filing.
MTD ITSA will be a requirement from the 2024/2025 tax year and the report for the first quarter will be due by 5 August 2024.
How do I process these reports?
Taxpayers will be able to keep their underlying records (receipts and invoices etc.) in paper format if this best suits them (i.e., there will be no requirement for all business’ underlying paperwork to be scanned and included in their digital records). However, the MTD ITSA legislation makes it clear that there will need to be an accompanying digital record for each transaction, with amounts allocated to the relevant income or expense category (broadly aligned to the current income and expense categories on the self-assessment tax return). It is the totals from these categories (but not the underlying transactional data) which will then be reported on a quarterly basis using accounting software.
There is a limited exception from this transactional record-keeping requirement for retail businesses with a high volume of low-value transactions: these businesses will be able to elect to maintain a single digital record of each day’s gross retail sales instead of recording each sale separately.
What is the government’s intention for creating this new scheme?
The government’s Making Tax Digital (MTD) is intended to move the UK towards a fully digital tax system, which is planned to allow taxpayers to easily keep digital records and report their tax liabilities and payments in real time. It is the government’s intention that this will both reduce taxpayer errors and increase the information available to HM Revenue & Customs (HMRC).
Who else is included in MTD ITSA?
Partnerships with any partners which are not individuals, LPs, and LLPs.
Partnerships will be required to keep digital records and make quarterly reports in the same way as taxpayers. The end of period statement will, however, be replaced by a ‘Schedule A1 Partnership Return’. This will need to include all partnership income (not just trade or rental income) which falls to be taxed in the relevant year and will also need to show the allocation of income and expenses to the partners. There will be no requirement for the quarterly returns to include an allocation of amounts to individual partners and partners will not need to make any quarterly reports in respect of their partnership income.
