MTD for ITSA - What Businesses Need to Know!

Digitalisation of tax is a huge focus for the UK government. Making Tax Digital for VAT is already running and demonstrating the benefits of digital working for many businesses. The next milestone will be rolling out MTD for Income Tax Self Assessment (ITSA) for self-employed individuals and landlords.

MTD for ITSA was previously due to be introduced from 6 April 2024 for sole traders and landlords with an annual qualifying income over £10,000. HMRC have recognised this requires a significant change in working while we’re in a challenging economic climate and have decided to change the mandate threshold, as well as shift to a phased roll-out from 2026.

In this article we’ll cover all the updates you need to know as well as who can get involved in early testing over the next year.

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What is MTD for ITSA?

Making Tax Digital for Income Tax is a new way of reporting income and expenses which will replace the Self Assessment returns for sole traders and landlords.

It will require the taxpayer or their agent to:

• Use software that is compatible with Making Tax Digital for ITSA

• Keep digital records of business transactions

• Send quarterly updates to HMRC which summarise those business transactions. Separate quarterly updates will be required for UK property, foreign property and each of your self employments.

• Provide details of any tax and accounting adjustments and reliefs to finalise your taxable income from property and self-employment.

• Provide details of other income sources and other information such as tax allowances and reliefs you wish to utilise that would have previously been included on your self assessment tax return.

• Confirm the information you have provided is ‘complete’ by making a ‘Final Declaration’ by 31 January the following year

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Where are we at now with MTD for ITSA?

It was announced in a written ministerial statement on 19 December 2022 that the launch of MTD ITSA would be pushed back, and the income threshold increased.

At the same time, the government announced a review of smaller business needs, to consider whether it makes sense to bring those under the £30,000 income threshold into MTD.

HMRC is now taking a phased approach:

• Self-employed businesses and landlords with an income greater than £50,000 will be required to comply with MTD for ITSA from April 2026

• Those with an income greater than £30,000 must comply from April 2027.

The inclusion of general partnerships has been postponed with a commitment to introduce MTD at a later date.

The aim is to provide more time for businesses, particularly those with the smallest incomes, to adapt to the new ways of working while also allowing HMRC more time to thoroughly test the process for all users.

Victoria Atkins, Financial Secretary to the Treasury, commented:

“It is right to take the time to work together to maximise the benefits of Making Tax Digital for small businesses by implementing the change gradually. It is important to ensure this works for everyone: taxpayers, tax agents, software developers, as well as HMRC.”

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What else has changed with MTD for ITSA?

At the Autumn Statement on 22 November 2023, the Outcome of the Making Tax Digital Small Business Review confirmed MTD for ITSA will not be extended to sole traders and landlords with income less than £30,000 for now, but the Government will continue to review this decision.

The changes to the scope of MTD for Income Tax, primarily the increase in the threshold from £10,000 of annual qualifying income to £30,000 means that the impacted taxpayer population has been cut by more than half and now stands at 1.75 million.

Here are the other changes announced at the update:

• The period covered by each quarterly update within a tax year will move from standalone to cumulative. This means that taxpayers will not need to resubmit a historic update in the event there is an error or an amendment and instead the most recent quarterly update will overwrite the preceding one. This is expected to significantly simplify the process of making quarterly updates especially when historical errors are identified.

• The End of Period Statements for each source of income will no longer be required. Those of you who have followed the developments of the MTD policy will remember that originally there was an additional submission between the quarterly updates and the finalisation of the return in order to confirm the completeness of the self-employment and rental income. In reality this submission was somewhat redundant because you could continue to adjust the income until the finalisation of the tax return. It added unnecessary complexity and ambiguity for taxpayers and as such HMRC have removed it to help simplify the process.

• There will be relief for landlords of jointly owned property. They can opt to keep less detailed digital records and opt out of submitting expenses within quarterly updates. The question of how landlords of jointly owned property would comply with the record keeping and submission requirements of MTD has plagued the programme since its inception. So HMRC has again simplified the design by introducing the easement and effectively taking the problem off the table.

• HMRC will develop a solution to allow multiple agents to engage in the process for a single taxpayer. The so called ‘multiple agents’ conundrum has been another key issue in the MTD design. Essentially, the move to quarterly reporting AND end of year reporting for multiple income streams could result in taxpayers wanting to use more than one authorised agent – something HMRC’s backend systems currently can’t support, but they have committed to implementing a solution ahead of mandating that will support this.

• Specific exemptions will be introduced for foster carers and individuals without a National Insurance number.

• The Furnished Holiday Lettings Tax Regime will be abolished from 6 April 2025. This will help to again simplify reporting.

Together, these changes address many of the unknowns and concerns around the MTD for Income Tax design and policy that lead to the delay.

HMRC now believe they are in a much better position to move the programme forward to a testing phase.

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What is the private beta and how does it work?

HMRC had previously paused their pilot testing of the programme prior to the delay announcement in December 2022 but relaunched private beta testing of MTD for ITSA on 22 April 2024 and are currently encouraging agents to sign up, however it is also possible for taxpayers to sign up directly.

Testing has been relaunched as a ‘private beta’ for tax year 2024/25 meaning that testing will be at a smaller scale.

The programme director of Making Tax Digital, Craig Ogilvie, told attendees at the Festival of Accounting and Bookkeeping in March that HMRC is focusing on “quality not quantity” for tax year 2024/25.

It’s also worth noting that whilst HMRC have addressed many of the key issues around the policy and design of the programme, the functionality will be implemented iteratively.

This means that whilst all the required functionality to support all taxpayers will be in place for April 2026 it won’t all be in place for day one of the beta testing.

Therefore, not all taxpayers are eligible to sign up for the 2024/25 private beta testing.

To be eligible for private beta, you (or your client) must:

• Have a tax year that runs from 6 April to 5 April (or 1 April to 31 March if your software can support this)

• Ensure personal details are up-to-date with HMRC

• Be a UK resident

• Have a National Insurance number

• Have submitted at least one Self Assessment tax return

• Be up-to-date with tax records and payments

You cannot sign up voluntarily if you:

• Have a High Income Child Benefit Charge (HICBC)

• Have a payment plan with HMRC

• Are a partner in a partnership

• Claim Married Couple’s Allowance

• Claim Blind Person’s Allowance

• Are bankrupt or insolvent

• Are a Lloyds underwriter, a minister of religion or an MP

• Receive income as a foster carer or are in a shared lives scheme

• Receive income from a trust

• Receive income from a jointly owned property

• Receive income from a furnished holiday let

• Are subject to a compliance enquiry

• Use ‘averaging’ arrangements because your profits vary between years (for example you are an artist, farmer, or writer)

There are a few important things to consider for anyone thinking about voluntarily taking part in the 2024/25 private beta testing:

• You will not be able to claim carry back losses, change accounting period or change accounting method during the period of testing.

• You can join part way through the tax year but will have to retrospectively submit quarterly updates from the beginning of the year. So if you’re not quite ready to join now you can still sign up later in the year.

• If you change your mind and no longer want to take part in the beta testing, you can leave and return to the usual self assessment process (however you will still need to join MTD from April 2026 if you are mandated.)

• HMRC have confirmed that those taxpayers participating in the beta will be subject to the new MTD for Income Tax penalty regime which is a ‘points’ based system similar to the regime for MTD for VAT with penalties for both late filing and late payment.

• However, HMRC has confirmed you will not incur any filing penalties for late submission of quarterly updates during the testing period, however this exemption does not apply to the online ‘Final Declaration’ due 31 January. This means you can still accumulate points under the new penalty system for submitting your online ‘Final Declaration’ late.

• You will still be subject to late-payment penalties while taking part in the beta, and these will be calculated using the new MTD method. This method calculates late-payment penalties as a percentage of outstanding tax and will apply if your payment is more than 15 days overdue (whereas the current regime begins after 30 days). So depending on the amount you owe, this could result in significantly higher penalties.

• You will have the benefit of extra support from HMRC, who in a letter to agents said “by joining the testing programme, you will have access to the dedicated MTD Customer Support Team to help you successfully transition to MTD for Income Tax and handle any issues. For those who join testing in 2024 to 2025, the team can also support the individual, or their agent, with some of the individual’s wider personal tax affairs (individual PAYE and Self Assessment matters) for the 2024 to 2025 financial year.”

The other key element to a successful beta is the availability of 3rd party software, without which, participants won’t be able to make submissions.

HMRC are hopeful that software providers will get on board early and support the programme to ensure successful end-to-end testing and ensure taxpayers and their agents have choice within the market.

The providers and their products that are currently participating and have been through the recognition process are listed on the HMRC software choices pages.

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What will happen after private beta?

If the current criteria rule you or your clients out from taking part in the private beta, make sure to check back next year as many restrictions will be dropped to expand testing further from April 2025.

Testing will ramp up in April 2025 to a large scale public pilot testing programme. This is in advance of mandated participation from April 2026 for sole traders and landlords with income above £50,000.

HMRC hope to encourage voluntary early adoption of MTD. They will continue to collaborate with users and address challenges throughout public pilot testing.

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What businesses need to do now

The service is currently voluntary.

HMRC are focusing on using private beta testing with agents.

If you are a sole trader or landlord you can also register directly for the service if you meet the eligibility criteria mentioned above.

Otherwise, continue sending annual Self Assessment returns as normal until MTD for ITSA becomes mandatory for you based on your qualifying income.

If you have an accountant acting as your agent, they can sign up to MTD for ITSA on your behalf.

HMRC will write to you and confirm you must start using MTD for ITSA from 6 April 2026 if you meet all the following criteria:

• You are an individual

• You are registered for Self Assessment

• You were a sole trader or landlord before 6 April 2025

• You have qualifying income of more than £50,000 in the 2024/25 tax year.

If you are responsible for your own bookkeeping, you will also need to make sure you move to software that works with Making Tax Digital.

To find out your software options, check HMRC’s list of MTD compatible software.

If you are looking to sign up voluntarily, you should speak to your software provider before signing up to the private beta. Due to a number of products are currently in development, so they are not available for MTD services yet.

HMRC has said they will continue to update this page as new software becomes available.

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Final thoughts on MTD for ITSA

The government will continue to work with all stakeholders involved to get the design of MTD for ITSA right.

HMRC believes a thorough testing programme will iron out any issues and provide HMRC with clarity on the final design.

Whether you’re an agent or a taxpayer, you can contribute to the ongoing testing by signing up voluntarily and help to ensure when the final services are rolled out, they address the needs of all users.

Here at Gow and Partners, we are dedicated to making sure your transition into the MTD for ITSA mandate is as smooth as possible!

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