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Who is exempt from MTD for ITSA?

October 6, 2022
Following on from the extension of Making Tax Digital for VAT (MTD for VAT) to all VAT-registered business owners, HM Revenue & Customs (HMRC) turns its attention to the next phase of MTD — Making Tax Digital for Income Tax Self Assessment.

Otherwise known as MTD for ITSA, this phase requires all eligible Self Assessment taxpayers and small businesses to file quarterly updates, submit and End of Period Statement (EOPS) annually and store digital records using MTD-compatible software.
However, while the scheme is designed to make tax filings easier for the 5 million Self Assessment taxpayers in the UK, Making Tax Digital for Income Tax isn’t mandatory for everyone — within reason.

As a result, individuals can apply to be exempt from MTD for ITSA. Read on to find out the different reasons for exemption, the exemption criteria and who it applies to.

Making Tax Digital for Income Tax: Overview

To get a better understanding of the exemption criteria, we’ll start by outlining what the qualifying criteria for MTD ITSA is and what the requirements are for those who are eligible.The first phase of MTD for ITSA is set to roll out in 6th April 2024, affecting all eligible sole traders and landlords. General partnerships aren’t expected to comply until 6th April 2025, whereas HMRC is yet to announce a later date for limited liability partnerships other business structures.
For a full breakdown of all the important MTD dates, have a look at our Making Tax Digital timeline here:

Making Tax Digital timeline from 2019 to 2026
If you’re a sole trader or landlord, you must comply with MTD for ITSA rules if you:
If you tick the above boxes, you’ll need to comply with Making Tax Digital for Income Tax requirements. This involves:
    Filing quarterly reports to HMRC using MTD-compliant software Filing a final declaration and confirm an End of Period Statement (EOPS) by 31st January to generate your final Income Tax bill Storing digital business records, either using MTD-compatible accounting software, or a combination of spreadsheets and bridging software

Who is exempt from MTD for ITSA?

There are 2 possible ways to be exempt from MTD for ITSA: either falling outside the scope of MTD ITSA, or by applying to HMRC for digital exclusion.To put it simply, outside of the scope of MTD for ITSA means that you do not meet the qualifying criteria and, as a result, don’t have to register, or can eventually deregister from the scheme — we’ll cover this in more detail below.On the flip side, applying for digital exclusion means that while you meet the eligibility criteria for MTD for ITSA, you’re unable to use MTD-compatible software to meet the requirements.For more around the exemption criteria details, read on.

Outside the scope of MTD for ITSA

If you don’t meet the qualifying criteria outlined above, you’ll fall outside the scope of Making Tax Digital for Income Tax and, as a result, will automatically be exempt from registering.To find out if you’re within the scope for MTD ITSA, HMRC will check your qualifying income and where you are domiciled.

Qualifying income

Qualifying income is classified as the combined income you get in a tax year from self-employment and property income, and is applied to your gross income before you deduct expenses.For example, if you earn £7,000 from a sole trader business and £6,000 in rental income from a property business, your gross income tallies up to £13,000. As a result, your qualifying income surpasses the £10,000 threshold, and you’ll need to register for MTD for ITSA.
For more on the different sources of income that contribute towards your qualifying income, check out our article ‘What counts as qualifying income under MTD for ITSA?’

It’s important to note that the £10,000 income threshold is based on the amount you reported on your last Self Assessment tax return due before the tax year in question. For this reason, sole traders and landlords who started generating income before 6th April 2023 don’t have to register for MTD ITSA by the 2024 deadline.For example, if the total business receipts on your 2022/23 Self Assessment tax return — which you’d need to file by 31st January 2024 — are less than £10,000, you won’t need to register for MTD for ITSA. Keep in mind that if your accounting period is less than 12 months, HMRC will adjust your income to 12 months’ worth to work out your qualifying income.If you register for MTD for ITSA and find that your qualifying income dips below this threshold, you won’t be able to deregister from the scheme until your qualifying income is less than £10,000 for 3 consecutive years.While the above outlines when it becomes mandatory for you to register for MTD ITSA, if you don’t match this criteria you can still sign up voluntarily.

Non-UK domiciled individuals

Before registering for MTD ITSA, HMRC will need you to confirm your domicile status.
This is because unlike the above, where registering on a voluntary basis is an option, if you are a non-UK domiciled individual you cannot register for MTD ITSA if you aren’t generating income in the UK. This is the case irrespective of whether you’re taxed on the remittance basis or the arising basis. For more information on this, head over to HMRC’s guidance note for residence, domicile and the remittance basis.

Under MTD ITSA, only income from UK self-employment and UK property counts towards your qualifying income. This means that if you’re domiciled in France, rent out property in Spain but are running a business in the UK, you’ll only need to count the income from your sole trader business towards your qualifying income.

Digital exclusion

Digital exclusion affects all stages of Making Tax Digital, and refers to cases where individuals cannot use technology to meet the requirements of MTD, such as digital record-keeping or filing quarterly submissions using MTD-compatible software.You can apply for digital exclusion if:
    It’s not practical for you to use software to keep digital records or to file digital submissions due to age, disability, location or another valid reasonYou are a practising member of a religious society or order whose beliefs are incompatible with using electronic communications or keeping electronic records

Other reasons for exemption

You cannot sign up for MTD ITSA if you are a:
    Trustee, executor or administratorNon-resident companyPersonal representative of someone who has diedLloyd’s member, in relation to your underwriting business

Applying for exemption from MTD ITSA

If you think you’re eligible for exemption from MTD for ITSA, you’ll be able to apply. HMRC hasn’t yet revealed the details of how to apply for exemption for MTD for ITSA, so be sure to watch this space — we’ll update you as soon as we know.Note: If you’re already exempt from MTD for VAT under the digital exclusion principle, you will automatically be exempt from MTD ITSA and will not have to apply for exemption.As part of your application for exemption, you’ll need to explain why your circumstances make you ineligible for MTD ITSA.From here, HMRC has 28 days to consider the information you’ve sent over and make a decision. After this, they’ll reach out to tell you:
    You’re exempt and what you need to do nextWhy you’re not exempt and how you can appeal
If you’re not exempt, or your appeal fails, you’ll need to register for Making Tax Digital for Income Tax by the deadline.If the reason for your exemption no longer applies, you’ll need to tell HMRC within 3 months.

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