Yikes! MTD for ITSA introduction not far off!

Well, after no less than four delays since it was first announced in 2015, it now looks like the first phase of the introduction of Making Tax Digital for Income Tax Self Assessment (MTD for ITSA) will finally go ahead at last.

If you’re a sole trader or small private landlord who will be impacted by MTD for ITSA, you may not exactly be chuffed, because it means you’ll need to comply with new tax reporting requirements. You may have to start using accounting software, too.

But whether you like it or not, once you’re captured by MTD for ITSA, you won’t be able to ignore the new reporting requirements, because you’ll face a fine if you do. And, filling out an annual Self Assessment tax return won’t be an alternative option, because they’ll become a thing of the past.

So, time for a quick reminder from Mike at GoSimpleTax, including MTD for ITSA introduction dates and an explanation of what sole traders and small private landlords must do to comply with the new accounting and reporting requirements.

MTD for ITSA introduction dates

• Sole traders and landlords with a gross trading or gross rental income of more than £50,000 will need to comply with MTD for ITSA requirements from 6 April 2026. Gross income means income before tax or any expenses are deducted.
• Sole traders and landlords with a gross trading or rental income of £30,000-£50,000 will need to comply with MTD for ITSA reporting requirements from 6 April 2027.
• In the Autumn Budget 2024, the government announced that before the end of this parliament, MTD for ITSA will be rolled out to include sole traders and landlords with gross trading or rental income of £20,000-£30,000.
• Barring any serious issues with the first two phases of introduction, it seems likely that MTD for ITSA will impact those with gross trading/rental income of £20,000-£30,000 from 6 April 2028.    

MTD for ITSA rules and requirements

Sole traders and landlords affected by MTD must maintain accurate digital accounting records that are fully updated regularly (at least every quarter). They’ll need to enter their income and expenses into MTD-compatible accounting software, which reports summary figures to HMRC every quarter. There is an option to use bridging software, which facilitates MTD quarterly reporting of their existing accounting software or records (eg spreadsheets). Maintaining paper-based bookkeeping records will not be permissible under MTD for ITSA reporting rules.  

Every quarter, the MTD for ITSA-compliant software will create quarterly updates, summarising the sole trader’s/landlord’s income and expenses. The software will report summaries to HMRC. The estimated tax liability will also be shown within the software, so that sole traders/landlords can better budget for paying their annual tax bill.

After the fourth quarterly update has been made, income and expenses for the whole tax year will be viewable. Adjustments can then be made and once the trading and/or rental income has been finalised, an updated tax bill estimate will be viewable. Where relevant, the sole trader or landlord will need to provide HMRC with summaries of other taxable income and tax expenses.

A final declaration can then be made via the MTD for ITSA software, confirming that the information provided in the previous four quarters is accurate and complete. This final declaration must be made by 31 January following the end of the UK tax year on 5 April. HMRC will then confirm the sole trader’s or landlord’s final tax bill.

MTD for ITSA key benefits

As already explained, having to conform to MTD for ITSA requirements will mean that sole traders and landlords will have a very good idea of how much tax they owe, so they can better budget for paying their annual tax bill. According to HMRC, this is a key reason why MTD for ITSA is being introduced.

Many sole traders already use accounting software, but those who don’t will potentially be far better able to manage their costs and cash flow thanks to MTD for ITSA, while being better placed to make decisions and judge how well their business is performing. It’s remarkably easy to learn how to use accounting software created for sole traders and landlords. As many could soon find out, Making Tax Digital could actually make tax much easier for UK sole traders and landlords.

HMRC wants to expand its current MTD for ITSA trial and is encouraging accountants to sign up their clients for inclusion in the expanded private beta testing trial in 2024/25, which was relaunched on 22 April 2024. HMRC has published updated guidance on how to “Sign up your client for Making Tax Digital for Income Tax”. The sooner that sole traders and landlords get the MTD for ITSA-compliant accounting software they need and get used to using it regularly the better.   

About GoSimpleTax

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