Making tax digital for income tax (MTD ITSA)  is coming in from April 2024 and is going to have a huge impact on most sole traders and landlords.

April 2024 may seem ages away – but your business needs to be prepared for the change, as you aren’t going to be MTD ready overnight!

This blog sets out the basics of the MTD ITSA regime, and how you need to prepare.

Who is affected?

MTD ITSA affects all sole traders and landlords with income over £10,000.  Note that this is income, and not profit, so unless your business is very small, you are likely to be caught.

What is MTD ITSA?

MTD ITSA is the digitalisation of tax data and submission. It requires you to keep digital records for your business – this means using MTD compliant accounting software such as Xero, Quickbooks, Freeagent etc

Currently you tell HMRC about your income once a year, via your self-assessment tax return.

This is being replaced by quarterly reporting – with everyone having the same quarter dates (5 July, 5 Oct, 5 Jan and 5 April).  The quarterly reports will be sent to HMRC digitally, from your accounting software.  They will have to be filed within one month of each quarter end.

There will then be a final report – called the End of Period Statement (EOPS) which needs to be filed by 31 Jan after the end of the tax year.  This will include any year end adjustments to your accounts, such as accruals, bad debt provisions, working from home claims etc.

On top of this – there will be a final declaration, replacing the current tax return.  This will bring together all your sources of income and finalise your tax liability for the year.

So one return is being replaced by five!

And if you are both a sole trader and a landlord, then you need to do the above for each source of income, so that’s 10 returns a year!


The Implications for your Business

MTD will impact your business.

At the most basic level:

  • You will need to start using accounting software and keep digital records, if you are not doing so already
  • This will need to be kept up to date, as information must be submitted quarterly
  • You will need a separate bank account for your business. If you mix business and personal transactions in one bank account, then you will have to analyse out all the personal transactions before submitting the info to HMRC
  • Cost  – MTD will have cost implications for your business:
    • HMRC have already said they will not be providing free software for you to use
    • Additional accountancy fees are inevitable if you want your accountant to help you with this
    • Training – if you want to do this yourself then you may need initial training in the software


What are the first steps to prepare?

Software is the key to MTD.  Good accounting software will automate a lot of the process and will generate the quarterly returns.  If these are accurate, then less work will be involved in creating the EOPS.

So the first step has to be digitalizing your accounting records.  Doing this sooner rather than later will help you get up to speed with using the software and ensure you are ready for April 24.  I would recommend using software from at least April 23, and possibly even from the start of this tax year,  April 22.

Secondly, if you don’t currently have a bank account that you just use for your business, then this should be done now.  It doesn’t have to be a business account, it can just be an account in your name, but it should be exclusively for business transactions.

How we can help 

MTD is massive and will fundamentally change the way many small businesses keep their accounting records.

The thought of 5 returns a year to HMRC rather than 1 is daunting to say the least.

We will be helping our clients to ensure the move to the new regime is as painless as possible, through webinars, training sessions, and regular updates as we move towards April 24.

For now we can help transition you onto accounting software.  Once you are up and running, you will wonder why you didn’t make the switch before, as you appreciate how simple it can be, and the time it can free up for you to concentrate on your business.

For more information please get in touch with Rosie Forsyth at Wilkins & Co.