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HMRC’s new Making Tax Digital for Income Tax Self Assessment (MTD for ITSA) rules will come into effect in April 2023. From then on, sole traders, partnerships and landlords with income above £10,000 will have to change the way they record and report income to HMRC.
Instead of submitting a Self Assessment tax return once a year, businesses and landlords will need to use MTD-compatible accounting software to send quarterly updates about their earnings, followed by a final update at the end of the year.
What is the MTD for ITSA digital start date for my client’s business?
Most businesses within the scope will be required to follow MTD for ITSA rules in their first full accounting period starting on or after 6 April 2023. Their first day under MTD for ITSA will be known as the digital start date.
Which clients will be affected by MTD for ITSA?
The majority of businesses and landlords with business or property income above £10,000 will be required to sign up for MTD for ITSA, and then use compatible software for their income tax accounting for the first full accounting period starting on or after 6 April 2023.
What are MTD for ITSA accounting updates, EOPS and final declaration?
For those signed up to MTD for ITSA, there will no longer be a need to send a Self-Assessment tax return with regard to income for the tax years occurring after their digital start date.
Quarterly updates for clients for client businesses:
- Defined as: “An electronic submission of summary totals for specified categories from the digital records of each business on a quarterly basis (obligation period) from the software to HMRC.”
- Updates are due from 10 days before, to one month after the quarter end date.
- The update doesn’t need to include a statement that the data is complete and accurate – no tax is paid at this point.
- HMRC returns a calculation of the estimated tax liability based on the information sent. This should be discussed with clients, with potential inaccuracies notified (e.g. pending later adjustments).
- Amendments to previously submitted updates can be made by resending the update for that period in the following period.
End of period statements (EOPS) for client businesses:
- One is required for each client business.
- The EOPS relates to the accounting period or basis period for the business and can’t be completed before the end of that period. It can be completed and submitted at any point after this date and up to the following 31 January.
- Process to finalise the taxable profit or allowable loss for any one source of business, or combined property income.
- The process will pull the information already submitted in the quarterly updates and make adjustments/additional information, such as allowances and reliefs.
- If not already included in quarterly updates, disallowable expenditure must be adjusted for.
- The submission must include a declaration that the information is complete and correct.
- Once submitted, HMRC returns a tax calculation.
What information will clients submit for MTD for ITSA (EOPS, quarterly reports, etc)?
The following are non-exhaustive lists and subject to change and confirmation by HMRC.
For a self-employment business the data required is likely to include:
- Business income (e.g. turnover).
- Business expenses (total and disallowable by type of expense, such as travel costs).
- Tax allowances for vehicles and equipment (e.g. capital allowances).
- Adjustments (e.g. basis adjustment).
- Balancing charges.
- Goods and services for client’s own use.
For a property business, the data required is likely to include the following:
- Property business income for both rentals and furnished holiday lettings (FHL).
- Property business expenses (e.g. premises running costs).
- Allowances (e.g. annual investment allowance).
- Adjustments (e.g. loss brought forward).
- Balancing charges.
For the final declaration, the individual is likely to be required to include the following among other things:
- Total UK dividend income for a tax year.
- Taxed UK savings interest.
- Untaxed UK savings interest.
Can clients opt out of MTD for ITSA?
As with MTD for VAT, it won’t be possible for most clients to opt out of MTD for ITSA if they fall within its scope.
However, it’s likely that those who fall under the digital exclusion rules as defined by MTD for VAT will be able to apply to HMRC to be exempted from MTD for ITSA.
This includes people whose disabilities mean they can’t use software, for example, for people whose remote location means internet access is impossible.
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