Your essential guide to the MTD Draft Regulations

A look at some of the key information on how Making Tax Digital for Income Tax (MTD for IT) will impact on reporting business, property and retail sales income and expenses.

HMRC are consulting on the details that will be needed as part MTD for IT. The rules will come into force from April 2024, so now is the time to start educating clients about how MTD will change things and what they must do.

Software Notice – made further to Regulation 3

Functional compatible software must comply with this condition:

Once a digital record has been entered into a software program that forms part of the functional compatible software, any transfer, recapture, or modification of that digital record within the functional compatible software must happen digitally and not manually.

Update Notice – made further to Regulation 8

The update information that must be provided in a quarterly update is dependent on the relevant person’s business or businesses.

Businesses with trade profits (income chargeable under Part 2 of the Income Tax (Trading and Other Income) Act 2005 (ITTOIA)).

A relevant person with trading income must provide the following update information in each quarterly update:

• quarterly period start date
• quarterly period end date.

They must provide totals of the amounts falling within the categories of transactions that lead to business income, including turnover and other business income.

They must also provide transactions that lead to business expenses, including wages, salaries and other staff costs, travel expenses and rent. For a full list of the applicable expenses see the table here.

Businesses with property income (income chargeable under Part 3 of ITTOIA) UK property (not UK or EEA Furnished Holiday Let (FHL)

A relevant person with property income must provide the following update information in each quarterly update:

• quarterly period start date
• quarterly period end date.

They must provide totals of the amounts falling within the categories of transactions that lead to property income, including rents, premiums for the grant of a lease and other income.

They must also provide transactions that lead to business expenses, including repairs, finance and legal costs.

For full lists of applicable income and expenses see the tables here.

Turnover below the VAT registration threshold

A relevant person with an annual turnover below the VAT registration threshold, as amended from time to time, may choose to provide the total of all income and the total of all expenses instead of the totals of the amounts falling within each category of transaction listed in this Update Notice.

End of Period Notice – made further to Regulation 12

The End of Period information that must be provided in an End of Period Statement (EOPS) is dependent on the relevant person’s business or businesses.

A relevant person must provide the following End of Period information in the EOPS:

• the totals of the amounts falling within the applicable categories of transactions detailed the Update Notice
• the additional information set out in this End of Period Notice.

Where a relevant person has not already decided whether the amounts included in each expense category of transaction set out in the Update Notice include any elements which are disallowable, the relevant person must remove any disallowable expenditure prior to providing the EOPS total for the relevant period.

Additional End of Period information to be provided in the EOPS Businesses with Trade Profits (income chargeable to Part 2 of ITTOIA)

A relevant person with trading income must provide totals of the amounts falling within the following categories:

• Annual Investment Allowance
• capital allowances for main pool costs
• capital allowances for special pool costs
• capital allowances for single asset pool costs
• zero-emission goods vehicle allowance
• customers’ Premises Renovation Allowance
• 100% and other enhanced capital allowances
• allowances on sale or cessation of customers use
• balancing charge on sale or cessation of customers’ use (only where Customers’ Premises Renovation Allowance has been claimed)
• balancing charge on sales of other assets or on the cessation of customers use
• adjustment for change of accounting practice
• averaging adjustment
• adjusted profit or loss for the year
• adjustment to profits chargeable to Class 4 National Insurance contributions
• zero emissions car allowance
• electric charge point allowance
• structures and buildings allowance
• (Freeport) enhanced Structured Building Allowance (SBA)
• Businesses with Property Income (income chargeable under Part 3 of ITTOIA).

A relevant person with property income must provide totals of the amounts falling within the following categories set out below:

• UK property (not UK FHL or EEA FHL)
• private use adjustment
• balancing charges
• annual investment allowance
• customers’ Premises Renovation Allowance
• zero emission good vehicle allowance
• other capital allowances
• cost of replacing domestic items
• rent a room exempt amount
• loss brought forward used against this year’s profits
• adjusted profit or loss for the year
• property income allowance
• zero emissions car allowance
• electric charge point allowance
• structures and buildings allowance
• (Freeport) enhanced Structured Building Allowance (SBA).

UK FHL:

• private use adjustment
• balancing charges
• capital allowances
• adjusted profit or loss for the year.

Turnover below the VAT registration threshold

A relevant person with an annual turnover below the VAT registration threshold, as amended from time to time, may choose to provide the total of all income and the total of all expenses instead of the totals of the amounts falling within each category of transaction listed in the Update Notice.

Retail Sales Notice – made further to Regulation 16

In respect of the retail sales of the business of a retailer digital records means a single digital record of the daily gross takings for any retail sales made.

The gross daily retail sales digital record must include:

• all payments as they are received by the relevant person or on the relevant person’s behalf from its own cash paying retail consumers. This includes payments by cheque, debit or credit card, maestro, visa or similar electronic transactions and electronic cash
• the full value of all credit or other non-cash retail sales received by the relevant person or on the relevant person’s behalf. This includes the full value of credit sales, the cash value of payment in kind for retail sales, the face value of gift, book and record vouchers received and any other payments for retail sales including those sales completed via third party online sales platforms.

There are a number of exclusions that can be made when calculating the amount of daily gross takings. These include counterfeit notes, illegible credit card transactions and inadvertent acceptance of a cheque guarantee card as a credit card.

A full list of exclusions is available here.