Editor | 15 December 2021
Income tax reporting is changing: Everything you need to know about Making Tax Digital for Income Tax Self-Assessment (MTD ITSA)

Income tax reporting is changing: Everything you need to know about Making Tax Digital for Income Tax Self-Assessment (MTD ITSA)

What is Making Tax Digital (MTD)?

MTD has been introduced by Government to revolutionize the tax system in the UK.

The new system requires tax records to be kept and submitted digitally, using compatible cloud accounting software.

Over £8.5 billion in tax went unpaid between 2018 and 2019. The aim of MTD ITSA is to make filings more accurate by digitising submissions. This should help people better understand what tax they owe and reduce the deficit.

MTD for VAT has been around since 2019 and will become compulsory from April 2022.

MTD for Income Tax Self-Assessment is the next step in the scheme.

Then MTD for Corporation Tax will be implemented by April 2026.

When does MTD for ITSA start?

The Government wants people to be able to use the scheme and ease into the system before it becomes mandatory in 2024. You’ll be able to voluntarily sign up for MTD ITSA from April 2022.

By April 2024, if you’re registered for self-assessment and have £10,000 in qualifying income you’ll need to be signed up to the scheme

What is the qualifying income?

If your turnover from self-employment and/or property exceeds £10,000 per tax year, you must register for the scheme.

This can be split, so if you received £6,000 from your self-employed business and £4,000 in rental income, you would need to sign up.

At the start of the scheme, your income will be based on your 2022/23 self-assessment tax return.

The £10,000 is not just profit. HMRC will be looking at turnover before expenses have been deducted.

Once signed up, you won’t be able to leave the scheme until your turnover is below £10,000 for 3 years.

It’s widely assumed that MTD ITSA will expand to all those paying income tax in the future. The plans for this are yet to be announced.

What will I have to submit?

Instead of an annual self-assessment, HMRC will require quarterly submissions detailing your self-employed and/or property income and expenses.

There will then be a 5th and final annual submission known as an End of Period Statement (EOPS). This 5th filing will cover all income and expenses for the full tax year.

Everyone will use the same quarterly submission deadlines, which can be found below.

The EOPS deadline date doesn’t fall in line with the quarterly returns. Instead, the EOPS filing relates to the end of the tax year. Like with the current self-assessment, this will be due for filing by 31st January.

This EOPS will replace your self-assessment tax return, but you must submit a separate EOPS for every income stream. If you have a rental property and a self-employed business that total £10,000 of turnover, you’ll need to file 2 EOPS.

This table shows the standard submission dates:

Quarter

Start date

End date

Submission deadline

Q1

6th April

5th July

5th August

Q2

6th July

5th October

5th November

Q3

6th October

5th January

5th February

Q4

6th January

5th April

5th May

You can request your quarter dates are changed to fall in line with the start and end of the month.

The submission deadlines will stay the same, giving you a few more days to complete the filing.

Quarter

Start date

End date

Submission deadline

Q1

1st April

30th June

5th August

Q2

1st July

30th September

5th November

Q3

1st October

31st December

5th February

Q4

1st January

31st March

5th May

When will my income tax be due?

Although the reporting system is changing, the payment schedule for income tax will remain the same. With a payment due by 31st January and payments on account in January and July.

Your Cloud accounting software will show your tax liabilities calculated after every submission. This will allow you to keep track and budget for your income tax bill, so there’s no longer the shock of a big bill in January.

When will the full details be announced?

HMRC are still working on the details of the MTD ITSA scheme and these will be announced over the coming months.

Both Xero and FreeAgent will be compatible with the HMRC submissions so you’re already a step ahead of many. The software will also have a built-in reminder of upcoming submission deadlines.

It will be a big change from the current reporting system, but the quarterly returns will give you a better oversight of the cash within of your business. It will also help you keep an eye on your tax bill throughout the year and budget accordingly.

We are closely following the Government updates and we’ll be sharing all the scheme updates with you as they’re released.