Making Tax Digital (MTD) for Income Tax Self Assessment (ITSA)
"WHAT IS IT AND DO I NEED TO WORRY ABOUT IT?"
You might have heard the term ‘making tax digital’ or MTD and wondered what it’s all about. Essentially, it is HMRC’s initiative to move us all into the 21st century when it comes to tax! And as usual, it’s taking longer than planned…but the deadline is getting closer.
In this blog, I explore what Making Tax Digital (MTD) for Income Tax Self Assessment (ITSA) means and what you need to consider in preparation for the deadline.
MTD FOR VAT REGISTERED BUSINESSES
For those who are VAT registered, we are already obligated to use the MTD systems for VAT returns. The great news is that it is making life so much easier.
Now, when we agree to work together, I generate the link, share it with you and as long as you know your Government Gateway ID and log in details to your account, we are all good to go in about 5 minutes. It is great because I can get on with things quickly and if the VAT deadline is tomorrow (!), we are not panicking about registering, etc. We can just get on with it and make sure everything you need to do is done on time.
MTD FOR SELF-ASSESSMENT
However…for those not VAT-registered and requiring income tax self-assessment services, the onboarding is really not as straightforward…YET!
Right now, in order for me to submit your self assessment, I have to send a request to HMRC to be your tax advisor. They will then send you a letter in the post. At this stage, we keep everything crossed that you have entered the correct address (especially if you have moved!), that Royal Mail is not on strike and that HMRC have enough people to send the actual letter.
After a few weeks of waiting, we either celebrate as we receive the special code or we start the process again, when we get fed up of waiting! …and I haven’t even started helping you with the actual assessment yet!
I highlight this difference because for some of the effort we may have to go through in switching to MTD…I hope you can see it will be worth it!
WHAT IS MTD FOR ITSA EXACTLY?
The switch to Making Tax Digital (MTD) for Income Tax Self Assessment (ITSA) is important because it finally brings self-employment tax a bit more in-line with income tax.
Eventually, all paper forms will be removed and we all will need to use software to submit our tax returns, online.
Another big change is that even though the annual tax return will stay (it will have a new name – final declaration), all those who are self-employed will be required to send information quarterly.
The actual tax will still be paid annually. But in a similar way to VAT returns being required quarterly, all businesses will be required to send quarterly updates on business income and expenditure.
This increase in reporting might seem daunting. You may be worried about the increased workload and also the software you may need to pay for to do this.
However, as with most of your accounting problems you come up with, I have a positive response to it! So, read on…
THREE GREAT REASONS FOR QUARTERLY REPORTING, AS PART OF MTD
Firstly, (and this is absolutely amazing, I promise), quarterly reporting will mean that you always have access to more up-to-date information!
You will know how your business is doing in ‘real time’, not 12 months or more later and not on just an annual basis. You will be able to make informed business decisions and grow your business faster.
I actually encourage you to analyze your business numbers monthly. But quarterly is a good start. It opens so many doors and provides you with new opportunities to grow your business. I admit that accountants’ fees may increase as we will be required to be involved more regularly, but in return you will get more support and help with making informed business decisions (and spotting things before it’s too late)…and that must be a good thing!
Secondly, you will no longer need to dread the tax bill – this huge lump sum which is suddenly sprung on you when you submit your annual form. You will know what you owe each time you submit the quarterly return, as this will be updated to reflect the annual payment.
Thirdly, it will force you to select software that works for you. What about the extra cost? Take a look at how much time you spend thinking, stressing, worrying and actually doing your accounts at the moment. I bet you that using good, online software could reduce that time significantly. In fact, I know so, from the experience of many of my clients who I have helped get set up on software, such as Xero.
Credit control can be made easy and most likely you will get paid faster. Reports, checks and reconciliations are also much easier. Any investment needed for the software will pay you back in free time, to do whatever you choose to do.
And if that still hasn’t convinced you, there are actually free versions of accounting software now, which are actually quite decent. Talk to me about your options – email: elizabeta@pieceofcakeaccounting.co.uk
WHO EXACTLY DOES THIS EFFECT AND WHEN?
I’ve mentioned ‘self-employed’ and ‘businesses’, but the accurate definition is that the new Making Tax Digital (MTD) for Income Tax Self Assessment (ITSA) rules will apply to:
Self-employed individuals and landlords with a turnover of more than £50,000 from April 2026, and those with a turnover of £30,000 and above from April 2027.
The changes will not affect limited companies and how they report on their profits.
MORE INFORMATION ON MTD
Still a bit confused by MTD and what it means for you? Think you are ok but just want to check?
Come and join me in my Facebook group – Bookkeeping Struggles of a Business Owner. We’ll be focussing a lot on Making Tax Digital (MTD) for Income Tax Self Assessment (ITSA) as the deadline creeps closer, as well as discussing your software options to make sure those quarterly reports and submissions are as easy as possible for you.
Visit the group today!
While this blog aims to provide helpful information, it’s important to remember that every business and person is unique. So, before making any decisions, we highly recommend seeking professional advice. We want to ensure that you have all the support you need to make the best choices for your situation!
