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What counts as qualifying income under MTD ITSA?

October 3, 2022
As of 6th April 2024, all eligible sole traders and landlords must be signed up to Making Tax Digital for Income Tax Self Assessment (MTD for ITSA).Set out by HM Revenue & Customs (HMRC), you must meeting the MTD ITSA requirements if you:
    Are registered for Self AssessmentGet income from self-employment, property or bothHave a qualifying income of more than £10,000
If you’re a self-employed sole trader or landlord registered for Self Assessment, you might be wondering what makes up your qualifying income.If so, you’re in the right place. We’ll be taking a close look at what exactly HMRC classifies as “qualifying income”, as well as what doesn’t count and what happens if your income dips below the threshold.

What counts as qualifying income under Making Tax Digital for Income Tax?

Qualifying income under Making Tax Digital for Income Tax is classified as combined income you get in a tax year from self-employment and property income.It’s important to note that your qualifying income is the amount your earn before you deduct expenses. For example:💡You make £12,000 a year from self-employment and spend £5,000 in business expenses. Even though your taxable income is £7,000, since your business income surpasses the qualifying income threshold, you’ll need to register your business for MTD for ITSA.For now, all other sources of income typically reported through your Self Assessment — such as employment income, dividends and savings — do not count towards your qualifying income.If you’re a UK resident and all your income comes from one of the qualifying sources, working out your qualifying income should be simple enough. However, if your situation isn’t so clear cut, read on to find out what HMRC counts as qualifying income in different circumstances.

Income from more than one source

If you have income from a small business and a property business, you’ll need to combine the amount you earn from both income streams to work out your total gross income. For example:💡 You make £5,000 in rental income and £7,000 from your sole trader business. As a result, your total qualifying income is £12,000.

Income from a jointly owned property

As for shared property, your proportion of the property rented out will contribute towards your qualifying income. For example:💡 You and a sibling rent out a property that generates £30,000 in income. Since you’ve opted for 50/50 ownership, you’ll both have a qualifying income of £15,000 — meaning you’ll both need to register for MTD for ITSA.

Residency and domicile

If you’re a UK resident running a sole trader business or renting out property, in the UK, anything you earn through your business or property counts towards your qualifying income.However, if you’re running a business overseas or renting out property abroad, whether your income from these sources counts as qualifying income is determined by your individual circumstance.

Resident domiciled in the UK

Any income from foreign property or foreign self-employment will contribute towards your qualifying income, as you are a resident UK taxpayer.Take for instance, if you’re running a sole trader business from the UK and are renting out property in France, you’d need to count both sources of income towards your qualifying income.

Domiciled in the UK

If HMRC considers your UK domiciled for the tax year, any income from foreign property or foreign self-employment will count towards your qualifying income.
However, if you remit foreign income from a year where the remittance basis applies to you, you won’t need to contribute your earnings towards your qualifying income. For more information on this, head over to HMRC’s guidance note for residence, domicile and the remittance basis.

Domiciled outside of the UK

Only income from UK self-employment and UK property counts towards your qualifying income if you’re domiciled outside of the UK.For example, if you’re domiciled in France, renting out property in Spain but are running a business in the UK, only your UK self-employment income will contribute towards your qualifying income.To make sure you’re attributing the correct streams of income towards your qualifying income, HMRC will ask you to confirm your domicile status when signing up for MTD for ITSA.

Beneficiaries

There are 2 instances where income from being a trust beneficiary will contribute towards your qualifying income: if you’re a beneficiary of a bare trust, or are a beneficiary of an interest in possession trust.If you’re the beneficiary of a bare trust, any property or trading income you’re entitled to will count towards your qualifying income.

Partnership

At this stage, income from a partnership does not count towards your qualifying income, unless you:
    Receive disguised investment management feesGet income based carried interest
In these cases, income is treated as the profits of a deemed trade and, as a result, will count towards your qualifying income.

What if my accounting period is less than 12 months?

If you've submitted enough data but have an accounting period less than 12 months, HMRC will be able to annualise your income.For instance, if you've only been trading for 6 months as a sole trader in your first tax year, HMRC will double the income you've made from your small business earnings to generate your qualifying income for the year.

What happens if my income falls below the qualifying income threshold?

You’ve registered your business for MTD for ITSA, but the years that follow sees your qualifying income drop below £10,000. So, can you de-register for MTD for ITSA?You’ll only be able to de-register your business is your qualifying income falls below the £10,000 benchmark for 3 consecutive years.Take for example, a UK-based sole trader’s qualifying income looks like this:
    2022/23 → £12,0002023/24 → £9,0002024/25 → £5,0002025/26 → £5,0002026/27 → £3,000
Since their income was above the threshold in the 2022/23 tax year, they’d need to comply with MTD for ITSA from the beginning of the 2024/25 tax year.This is because their Self Assessment tax return for the 2022/23 tax year is filed by 31st January 2024, before the beginning of the new tax year. As a result, even though their qualifying income in 2023/24 was below the threshold, they’ll still need to register.However, as the 2024/25 and 2025/26 tax years also qualifying incomes below the £10,000 threshold, this brings the total consecutive years below the threshold to 3. As a result, the earliest the sole trader can de-register their business for MTD for ITSA is 2026/27.Depending on personal circumstance, you might find that you can apply for exemption if it’s “not reasonably practicable” for you to comply with MTD.

How do I report my income?

If you’re a sole trader or landlord and meet the above criteria, you’ll need to register for MTD for ITSA by 6th April 2024. If you’re running a limited company (LLC), limited liability partnership (LLP) or general partnership, your registration date will be slightly later — for more precise dates and eligibility criteria, head over to our piece Who will be affected by MTD ITSA?’

Once registered, you’ll need to send updates to HMRC every quarter using MTD compatible software. Every 3 months, your selected software will add together your digital records to create totals for each income and expense category to generate your quarterly updates.At this stage, you won’t need to make any accounting or tax adjustments to the quarterly returns you submit, but you can do so if you want a more accurate estimate of your tax bill.At the end of the tax year, the updates you’ve sent across the year will be combined to show your income and expenses for the tax year. From this information, HMRC will generate an End of Period Statement (EOPS), which you’ll need to confirm by 31st January through your selected accounting software.💡If you have more than one business, you’ll need to confirm an EOPS for each business.To make the data on your final declaration as accurate as possible, you may need to make the following adjustments before confirming:
    Make accounting adjustmentsMake tax adjustmentsClaim reliefs or allowances
After finalising your tax position for the year through these measures, you’ll be sent an updated estimate of your tax bill.

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