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Contents

  1. 1. What records do I need to keep under MTD ITSA?
  2. 2. Why do I need to store digital records?
  3. 3. I’ve noticed a mistake in my digital records. What do I do?
  4. 4. How can I store my digital records?

What records do I need to keep under MTD ITSA?

December 12, 2022
As Making Tax Digital for VAT (MTD VAT) completes its full rollout, HM Revenue and Customs (HMRC) turns its attention to Making Tax Digital for Income Tax Self Assessment (MTD ITSA).

Much like its predecessor MTD VAT, eligible individuals are required to store their business records digitally. However, as MTD ITSA is set to replace the Self Assessment tax return, self-employed business owners, landlords and eventually partnerships will need to store records of their business or rental income, before sending to HMRC to generate their final Income Tax bill.

We’ll be exploring the different records sole traders and landlords need to keep under MTD ITSA, why HMRC is implementing this change and how you can take charge of your digital record-keeping.

What records do I need to keep under MTD ITSA?

Under MTD ITSA, you’ll need to use MTD-compatible software to store records of all sources of income — including personal income, property income and business income — and expenses.In each quarterly period, you’ll need to provide the following information:
    Quarterly period start dateQuarterly period end dateTotals of the amounts falling within each category of transaction
The categories of transaction for both small business owners and landlords are outlined below:
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Business IncomeBusiness Expenses
TurnoverCost of goods bought for resale or goods used
Other business incomeConstruction industry payments to contractors
Wages, salaries and other staff costs
Car, van and travel expenses
Rent, rates, power and insurance costs
Repairs and maintenance of property and equipment
Phone, fax, stationery and office costs
Advertising and business entertainment costs
Interest on bank and other loans
Bank, credit card and financial charges
Irrecoverable debts written off
Accountancy, legal and professional fees
Depreciation and loss or profit on sale of assets
Other business expenses
Property IncomeProperty Expenses
Total rentsRent, rates, insurance, ground rents
Other incomeProperty repairs and maintenance
Tax taken from total rents and other income from propertyResidential property finance costs
Premiums for the grant of a leaseNon-residential property finance costs
Reverse premiums and inducementsLegal, management and other professional fees
Costs of services provided, including wages
Other allowable property expenses
Source: GOV.UK

You can find the full list of records you’ll need to keep, including those you’ll need to hand when filing your End of Period Statement (EOPS) at GOV.UK.

When taking stock of your transactions, be sure to record them:
    As close to the date of transaction as possibleBefore you send the quarterly update for the periodNo later than the quarterly deadline
If you’re running a retail business with a high number of low-value transactions, you can choose to maintain a single digital record of each day’s gross retail sales, saving you from having to record each sale separately.
In a similar vein, if your annual turnover is below the VAT registration threshold, you can choose to provide the total of all your income and total of all your expenses instead of the totals of each category of transaction.

Why do I need to store digital records?

Being one of the main MTD rules, storing digital records is fundamental in helping HMRC achieve its goal of making tax administration more effective, more efficient and easier for taxpayers to get their tax right.Storing digital records also offers benefits for those needing to comply with MTD ITSA, such as:
    Increased efficiency: Instead of rifling through shoeboxes of receipts, with the right software provider you’ll be able to easy source specific transactions in a handful of clicks.Reduces errors: Since software does a lot of the heavy lifting for you, you can avoid the errors that can occur in manual calculations and when information is transposed by hand.More accurate records: By using software to record your records in real time, there’s a lower chance your records will be incorrect or incomplete due to lost or erroneous invoices.Aligns with the digital age: Since most businesses use online banking, online payment methods and online communications, taking your tax online is the next logical step.Better compliance: You’re more likely to get additional, in-built help with your taxes using software, making it easier to ensure you’ve filed your paperwork correctly and met your obligations as a business owner.

Do I have to store digital records under MTD ITSA?

In short, yes: unless you’re eligible for exemption, you’ll need to store your records digitally using MTD-compliant software. Failure to store the correct digital records can result in a fine.

You can still store paper records if you wish, but you’ll need to make sure there is a digital duplicate that you can send to HMRC when filing your quarterly returns.

I’ve noticed a mistake in my digital records. What do I do?

No approach is perfect, and mistakes can still happen when using software to store records. You may find you’ve accidentally duplicated a transaction, or completely forgot to record one altogether.If this is a case, you’ll need to update your records as soon as possible — this will be either when you file your next quarterly update or when confirming your End of Period Statement (EOPS).To update your records, simply change, delete or create the record, so that the transaction is recorded in the correct quarterly period in which it took place. Once you’ve corrected the record and submitted either your quarterly return or your EOPS, your submission will immediately overwrite the previous one recorded.

How can I store my digital records?

Under Making Tax Digital for Income Tax, you can store your records by using either MTD-compliant accounting software, or a combination of spreadsheets and bridging software.

You’ll need to make sure the software you choose can communicate with HMRC through an Application Programming Interface (API) platform using digital links. In doing so, you’ll be able to securely transfer your business records from your software to HMRC’s systems.While spreadsheets are better suited to those who are hesitant to adopt going digital, using compatible accounting software can offer other benefits to users, such as invoice generation, VAT management and more.
Rachel Cameron-Potter
Rachel Cameron-PotterContent Marketer

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