Making Tax Digital for Income Tax Part 2 – The Return of the Giant Pain in the Bum
They’re back at it. HMRC have resurrected Making Tax Digital for Income Tax and Self-Assessment (MTD for ITSA), but helpfully they have made it a bit snappier by losing a bit (it is now much more catchily known as Making Tax Digital for Income Tax, or MTD for IT). And this time it looks like it’s really going to happen.
It’s going to affect all self-employed and landlords with income over £20,000 as well as directors who receive income outside of PAYE. But, depending on your income, you’re going to need to worry about it at different times.
So I thought it would be hella helpful to lay all the facts out again so you can get the dates in the diary and get prepared for what it means in terms of looking after your accounts and finances (skip to the end for the handy downloadable quick guide).
What Is MTD for IT?
MTD for IT is an overhaul of the way HMRC wants people who use the self-assessment service to keep records. It will require that people keep their accounting records using Making Tax Digital compliant software, and that these records are kept up to date using quarterly reporting direct to HMRC from the software.
What Do You Need to Do?
For each separate business entity, you will need to submit to HMRC:
Quarterly ‘updates’ on your income and expenditure. The first of these will be due by 5th August each tax year. This timing means that you will have one month after the end of the quarter to complete each quarterly update.
An annual ‘End of Period Statement’ (EOPS), which will be due by 31st Jan AFTER the tax year end (for example, for the tax year 2025-2026, the first EOPS will be due by 31st January 2027)
Then, to tie everything together, you will need to submit a ‘Final Declaration’, also by 31st January after the end of the tax year. This will be very much like the current annual self-assessment and serve to bring together all income information (including PAYE and dividends)
What Happens If You Don’t Do It, Or Do It Late?
It is important to know that HMRC are introducing a new points-based penalty system alongside MTD for Income Tax. Where a customer (yes, this is really what HMRC calls you!) misses a quarterly or annual submission, they will receive a penalty point. Once the customer reaches the points threshold, there will be a financial penalty. New late payment penalties are more proportionate, and charged at different rates based on when the outstanding amount is paid.
When Does This Affect You?
The implementation of MTD for IT depends on your combined level of income (NOT profit) from property or self-employment, you will need to use MTD software to comply with MTD for IT from:
April 2026, if you earn £50,000 or above
April 2027, if you earn £30,000 or above
April 2028, if you earn £20,000 or above
How Will You Do All This?
HMRC will require that all self-employed people keep DIGITAL records and use software to make these new submissions to HMRC.
By far the easiest way to manage all of this will be to use dedicated accounting software packages such as Xero, QuickBooks, Sage, FreeAgent (and a quite a few others!). Users can have their bank connected to the software to pick up on all transactions, receipts/invoices can be stored in the software (and not in THAT drawer or box that you avoid catching glimpses of and gives you hives once a year), and your bookkeeper and/or accountant would have access. More importantly, there’s all manner of tools and apps that such software offers that would make your life easier and help to grow your business.
Can You Stick To Using Spreadsheets?
Yes, it will still be possible for people to use spreadsheets for their accounts to still do so, and then use ‘bridging software’ to make submissions to HMRC. It will avoid any monthly software subscription costs and you won’t have to change systems. BUT it also means finding a suitable bridging software (usually with a small charge per quarter or year), doing all the calculations yourself with room for error, remembering to submit on time, and STILL keeping all that pesky paperwork about!
You can get accounting software packages pretty cheap, it’s even worth speaking to a practitioner as we can often get discounted deals on software for you.
And remember, if you don’t fancy doing anything more than you already do – get a bookkeeper on board as your agent and we can do it all for you.
A Silver Lining?
I know this all MTD for IT malarky sounds like a massive pain for you as a self-employed individual who probably doesn’t like faffing about too much with the money stuff. But if you’re able to keep your accounts and records up to date – it really only amounts to a few extra button clicks every few months and checking that everything is being recorded.
If you’re still stressed about it (there are not usually enough hours in the day and you probably didn’t start your business because you love doing your accounts…), please do consider speaking to a bookkeeper. Think of how all those saved hours of YOUR time can be better channelled into business or home life! And we can not only make sure you’re MTD for IT compliant, avoiding penalties, but many of us offer all manner of services that can really supercharge your business growth.
A Helpful Link for Further Reading:
https://www.gov.uk/guidance/use-making-tax-digital-for-income-tax
Need a Little Reminder?
This is all a lot to remember, so I’ve created a little downloadable infographic for you to keep nearby for when you might need it. Just click the image to the right!
And, please, if you have any questions do get in touch with me via claire@ammoniteaccounts.co.uk
