Self-employed or a landlord? – Making Tax Digital for Income Tax is on its way

making tax digital
Posted 2021 by Jane Loxton

Updated 27 Sept 2021

Making Tax Digital for VAT has been in place since 2019 and was to be extended further from 1 April 2022 to include those with taxable incomes below the VAT registration threshold who have voluntarily registered.

The next stage along HMRC’s digital roadmap is Making Tax Digital for Income Tax Self-Assessment [MTD(ITSA)] which will take effect from 6 April 2024.

HMRC believe that most reporting errors are made by those with small incomes and in an attempt to combat the tax loss, new rules will apply to sole traders, partnerships and landlords with gross incomes above £10,000.

What are the main changes of MTD?

The main changes from the current record keeping requirements are that records must be kept in digital format on a transactional basis, and submit quarterly updates made to HMRC using API enabled software. Simply entering totals will not be acceptable (subject to some reliefs for retailers who may enter the days takings).

Whilst most VAT registered businesses are already using some form of accounting software in order to keep their accounting records and submit VAT returns, there are estimated to be 4 million self-employed and landlords with gross income between £10,000 and the VAT threshold of £85,000 not currently required to maintain digital records, so this change will have an impact on a huge number of taxpayers.

Who is exempt from MTD?

There will be some groups that are excepted from the rules, at least to start with, for example the rules will not apply to Estates, Trusts, LLPs, partnerships with a corporate partner or the digitally excluded.

Although separate records must be kept for each source of income and reported on an individual basis, in determining whether the £10,000 has been breached an individual must add up their income from all reportable sources eg self-employments and rental incomes. However, they do not include any partnership income in the £10,000 calculation. Partnerships report on a partnership level so each partnership must determine if its income source exceeds £10,000 and make quarterly updates if the £10,000 limit is breached.

When should I file my digital tax updates?

Quarterly updates must be filed within one month of the end of the quarter but because each income source will require a separate update and quarter dates for each income source may be different, an individual could end up submitting multiple updates to different deadlines each month. Add to that their existing VAT reporting requirements and the filing obligations become extremely burdensome. A far from ideal situation.

As a result of submitting each report HMRC systems will calculate an estimated tax liability but how accurate those figures end up being, only time will tell. Unless either HMRC systems or the taxpayers’ own software can track all income and allowances, only in the most simple of cases will an estimated tax liability prove to be accurate.

An End of Period Statement will be required by 31 January for each income source after the end of the tax year. After that a finalisation report bringing everything together, similar to the existing self-assessment return will be made to confirm that all sources of income have been reported.

Example of tax reporting requirements

A plumber prepares accounts to 30 April each year and VAT returns to May, August, November, February. He has one property which he lets out. Combined income is £100,000.

As the rules currently stand reports in the 12 months from April 2024 are required as follows:

  • 7 July 2024 VAT return to 31 May 2024
  • 5 August 2024 quarterly rental income update
  • 31 August 2024 quarterly self-employment update
  • 7 October 2024 VAT return to 31 August 2024
  • 5 November 2024 quarterly rental income update
  • 30 November 2024 2024 quarterly self-employment update
  • 7 January 2025 VAT return to 30 November 2024
  • 31 January 2025 End of Period Statement for self-employment income
  • 31 January 2025 End of Period Statement for rental income
  • 31 January 2025 End of year finalisation return
  • 5 February 2025 quarterly rental income update
  • 28 February 2025 quarterly self-employment update
  • 7 April 2025 VAT return to 28 February 2025
  • 5 May 2025 quarterly rental income update
  • 31 May 2025 quarterly self-employment update

Next steps

These changes will be a real step-change for taxpayers and certainly those with multiple income sources should be speaking to their tax agents now. Please register your interest in learning more about MTD and we can help you to find your way.