MTD for Income Tax information

When originally announced in George Osborne’s 2015 Budget Speech, HMRC stated that Making Tax Digital will become ‘one of the most digitally advanced tax systems in the world’.

MTD for VAT was first planned to be live from 2018 but in fact was fully rolled out in April 2022. MTD for Income Tax Self Assessment (ITSA) was first delayed to 2024 but has now been further delayed to April 2026, eight years after it was originally planned to be fully live. Even further delays should not be ruled out, whilst HMRC works through a great backlog from Covid-19-related work and irons out any problems with the MTD for ITSA system internally.

Starting from April 2024, businesses will be taxed on profits for the tax year instead of being taxed on the profits for the accounting year that ends within a tax year. For 2024 to 2025 onwards, where accounting years are different from the tax year end, the taxable profits will be worked out by apportioning the profits for the 2 accounting periods that straddle the tax year.

2023 to 2024 is the ‘transition year’ in which self-employed businesses will move to the new way of calculating taxable profits for the tax year. Businesses will need to declare the total profits from the end of the last accounting date in 2022 to 2023 up to 5 April 2024. This means that profits generated over a longer period will be taxable in the 2023/24 transition year.

In 2023/24, businesses can use any overlap relief resulting from overlap profit when the business first started. By default, any remaining additional profit can be spread over 5 years.

For example, if a business’s accounting date is 31 December 2023, they must declare profits from 1 January 2023 to 5 April 2024 (15 months rather than 12) in their tax return for the tax year 2023 to 2024, which is due by 31 January 2025.

The transition year 2023 to 2024 will present an opportunity for all businesses currently trading, regardless of accounting date, to use any overlap relief due.

MTD for ITSA will apply from April 2026 to individuals where turnover from self-employment and property exceeds £50,000 in a tax year (this was previously announced as £10,000), and it’s likely there will be a ‘soft landing’ period just as there was for MTD for VAT where businesses were given some time to get used to the new filing requirements. From April 2027, the MTD for ITSA income threshold will lower to £30,000. MTD for Partnerships has been scrapped indefinitely. HMRC’s long-term plan is to also include limited companies within MTD.

One of the biggest changes with MTD for ITSA will be the requirement to send quarterly summaries of their income and expenses to HMRC, a process that VAT customers will already be familiar with. This should help HMRC provide more accurate tax estimation figures. At the end of each tax year, any other non-business income or information can also be submitted using MTD-compatible software such as Xero or QuickBooks. Ultimately, this will replace the need for a single annual Self Assessment tax return. The deadlines and tax year dates will not change.

Please contact LR Accounting if for further information or our PDF guide on Making Tax Digital.