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MTD for Income Tax: How your Self Assessment is changing

October 26, 2022
If you’ve been running your business for a while, you’re probably familiar with the step-by-step process of filing your annual Self Assessment tax return.

However, as HM Revenue and Customs (HMRC) pushes through the next phase of Making Tax Digital (MTD), all eligible sole traders and landlords (and eventually partnerships) will need to adapt to a new way of reporting their earnings and paying Income Tax.

With Making Tax Digital for Income Tax Self Assessment (MTD for ITSA) launching in April 2024, you might be wondering how your Self Assessment return is going to change.
If so, read on. We’ll be breaking down all you need to know about Making Tax Digital for Income Tax, what the requirements for MTD ITSA are and how they differ from the way you currently file your Self Assessment tax return.

What is Making Tax Digital for Income Tax?

Introduced in 2019, Making Tax Digital is an HMRC initiative designed to make it easier for taxpayers to report earnings and pay taxes with minimal mistakes.
Due to launch in 2024, Making Tax Digital for Income Tax is the second phase of MTD, and is set to change how business owners and landlords with a qualifying income above £10,000 report their income and expenses.

Under MTD ITSA, you’ll need to use MTD-compatible software to:
    Create and keep digital business records of all transactions using either accounting software or spreadsheetsSend updates to HMRC every 3 months detailing your business and property income and expenses for the quarterConfirm an End of Period Statement (EOPS)Submit a Final Declaration to HMRC either through accounting software or HMRC online account
If you have more than one business, you’ll need to meet the MTD ITSA requirements for each business you have.

MTD for Income Tax vs. Self Assessment

If you’ve submitted a Self Assessment before, you might be wondering how MTD ITSA differs from your previous tax return submissions.As HMRC’s main ambition for MTD is to improve the accuracy of the records they’re sent, the main changes you’ll see are in how you store your digital records and how regularly you report them to HMRC.In this piece, we’re going to break down the 4 main changes taking place under MTD ITSA:
    Digital record keepingQuarterly updatesEnd of Period Statement (EOPS)Final Declaration

Store digital records

At present, you can store your records either digitally or on paper. This is set to change under Making Tax Digital for Income Tax.
Much like Making Tax Digital for VAT, under MTD ITSA you’ll need to use compatible software to store digital records of your personal, property and business income and expenses.

Alongside evidence of your qualifying income, you’ll need to store the following records:
    Sales receipts and invoicesEmployment incomeBank and building society interestDividendsPension contributionsStudent loan repayments
You can find the full list of records you’ll need to keep over at GOV.UK.

All records should be recorded:
    As close to the date of the transaction as possibleBefore your quarterly update for that periodNo later than the quarterly deadline
If you notice a mistake in your records, you’ll need to make an update as soon as possible. This can be done either when sending your next quarter;y update, or when confirming your EOPS.

File quarterly updates

If you’ve filed a Self Assessment before, you’d have reported all your transactions at once at the end of the year. Under MTD ITSA, however, you’ll need to report your transactions to HMRC every 3 months using MTD-compatible software.You can choose to file your updates using either standard or calendar quarterly period updates.Standard quarterly updates
Period coveredFiling deadline
Quarterly update 16th April to 5th July5th August
Quarterly update 26th July to 5th October5th November
Quarterly update 36th October to 5th January5th February
Quarterly updated 46th January to 5th April5th May
Calendar quarterly updates
Period coveredFiling deadline
Quarterly update 11st April to 30th June5th August
Quarterly update 21st July to 30th September5th November
Quarterly update 31st October to 31st December5th February
Quarterly update 41st January to 31st March5th May
You can choose to send updates more frequently if you want to know how any sizeable business receipts or expenses affect your estimated tax bill.If you know you won’t be making any more transactions — for instance, you go on holiday before the end of the period and won’t be working — you can send an update up to 10 days before the end of your quarterly period.At this stage, you won’t need to make any tax or accounting adjustments before you send over to HMRC, but can do if you want to get a more accurate picture of your final tax bill.

End of Period Statement (EOPS)

Instead of filing a Self Assessment tax return, under MTD ITSA you’ll need to confirm an End of Period Statement — or EOPS — before submitting a Final Declaration.At the end of the tax year, all the information you’ve submitted in your quarterly updates is combined together to create an overview of your income and expenses. You’ll need to submit an EOPS for each business you run.Before confirming an EOPS, you may need to make tax and accounting adjustments, or claim any reliefs or allowances you’re entitled to. These updates will amend the data you’ve sent through in your quarterly updates.After confirming your EOPS, you’ll be able to see an updated estimate of your tax bill for the tax year.

Final Declaration

Once you’ve finalised your business income, you may also need to send HMRC details around any personal income sources you have, such as income from savings or dividends.Since these sources of income don’t contribute towards your qualifying income, you won’t need to detail them in your quarterly updates. However, you will need to list them in your Final Declaration, so be sure to keep tabs on these additional sources of income.Making your Final Declaration is the last step of reporting your income to HMRC, and once done will generate your final tax bill for the year — replacing the need to file a Self Assessment.If this seems like a lot to take in, you won’t have to worry about remembering the dates — the deadlines for submitting both your EOPS and Final Declaration, as well as paying your Income Tax bill, are 31st January following the end of the relevant tax year.
Self AssessmentMTD for Income Tax
Can store digital or paper recordsMust store digital records using MTD-compatible software, such as accounting software or spreadsheets and bridging software
Send all records to HMRC with tax returnSubmit quarterly returns detailing transactions for that period
Submit one Self Assessment tax return, either online or on paperConfirm an EOPS to finalise your business income using MTD-compatible software
Submit a Final Declaration finalising your Income Tax position for the year

Benefits of MTD for Income Tax

If you find the above overwhelming, you might be struggling to see why exactly MTD ITSA has been implemented. However, once you’ve got to grips with the basics, you’ll find that MTD ITSA has a lot to offer.By filing on a quarterly basis, you’ll get a more accurate picture of what your tax bill for the year looks like, making it easier to set aside enough money to cover your bill.With more regular updates, you’re also less likely to miss any transactions, helping you to steer clear of penalty payments.You’ll also find that with more regular updates, you’ll have less transactions to take into account, meaning quarterly updates take less time in the long run to compile.

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