MTD ITSA – What is it and will it affect me?

Pushed back deadlines and changes to qualifying criteria has resulted in many businesses, property owners and even accountants being unaware on how MTD ITSA will impact them and their clients.

Add in a well buried update within government’s Policy Paper from the recent Autumn 2024 budget and everyone can be forgiven, as the goal posts seem to continually change.

So, what is MTD ITSA and where do stand now?

MTD ITSA is the second wave of HMRC’s making tax digital transformation and will change the way sole trader businesses and landlords report their income to HMRC.

It is essentially a requirement to keep and submit digital records to HMRC and will replace the current annual self-assessment for those affected.

Many were hoping that a new government would postpone or even abolish the regime. However, the policy paper made it clear that “government is committed to delivering Making tax Digital (MTD) for Income Tax Self-Assessment” and “will expand the rollout.”

Cynics would say, we have heard this all before but with the abolition of the FHL scheme, changes to the default method of accounting (now cash basis) and basis period reform having been implemented since the last push back, all signs now suggest that HMRC intend to stick to the April 2026 roll out date.

Government will expand the rollout to taxpayers with qualifying incomes over £20,000. This will bring a significant number of unaware and unrepresented taxpayers into the regime.

It is anticipated that this third tranche of the rollout will be applied after April 2027 and before the end of this parliament, but government will confirm at a future fiscal event.

HMRC will now adopt an initial 3 stage approach, starting in April 2026.

• From 6 April 2026 - Sole trade businesses and landlords with qualifying income over £50,000 will be required to register and comply with MTD ITSA.
• From 6 April 2027 - Sole trade businesses and landlords with qualifying income over £30,000 will be required to register and comply with MTD ITSA.
• Estimated to be After 6 April 2027 – Sole trade businesses and landlords with qualifying income over £20,000 will be required to register and comply with MTD ITSA.

It is important to note that qualifying income is based on the combined income from these sources and not profits or income in isolation.

Partnerships will be required to join at a later date which has yet to be announced.

Those affected will need to:

• Keep and submit digital records of their business income and expenditure.
• Send quarterly reports to HMRC for each type of revenue (i.e. a taxpayer with a sole trade and property business will need to send 8 quarterly reports, 4 for each business)
• Send a final declaration to HMRC.

The final declaration is a chance to make adjustments, add income, gains and claim reliefs. It will effectively replace the existing self-assessment tax return.

Taxpayers will need to use software that is compatible with MTD ITSA.

There are a couple of methods for doing this. The first uses spreadsheets and bridging software to send records and the second, uses commercial MTD compliant software that is directly linked to HMRC’s platform via API’s.

The second option is generally considered superior, but there are pros and cons to both. We recommend talking to your accountant or tax advisor to discuss what is best for you.

With just over 500 days to go until the rollout goes live, here are several steps you can take to prepare yourself:

• Talk to an advisor who understands the MTD ITSA regime - Advisors with MTD experience will be able to help steer you through the process and save you a huge amount of time and stress.
• Assess your qualifying income levels - Are you someone that will be affected?
• Hold a dedicated business bank account for each business - This will make the whole MTD process much simpler.
• Start keeping records digitally - Starting early will give you time to refine your processes.
• Get into the habit of completing your bookkeeping on a regular basis - Quarterly updates will mean that you need to file more regularly.
• Look into the benefits of online software - Whilst there is usually a small cost attached (not always), cloud based online software can have huge benefits that many will think worth the money.

If you think you might be affected or are interested, please don’t hesitate to get in contact as we are happy to help.