Making Tax Digital for Income Tax: The Comprehensive Guide

Time to Read:

15 minutes

Naveed Mughal

What is Making Tax Digital?

What is Making Tax Digital for Self Assessment (MTD for ITSA)? What will change? Am I exempt from it? How it is supposedly going to simplify my tax process and save me time?

Even now, after announcing the big change of MTD, missing the first deadline, and delaying it another couple of years, many businesses still have a lot of questions about the process. After all, it is mandatory, and it´s coming whether we like it or not. If, like many other business owners, you have worries or just unanswered questions, fret not. We´ve compiled this comprehensive guide to hopefully answer every question you could possibly have (including ones you didn´t even think of!).

The Making Tax Digital for Income Tax Self-Assessment (MTD for ITSA) is a new requirement for small business owners in the United Kingdom. All businesses and self-employed individuals with an annual income tax bill of more than £10,000 will need to use MTD-compatible software to keep records of their business income and expenses. This came into effect in April 2019 and has also been extended to all VAT-registered businesses in the UK.

This will mean using accounting software or an app that can connect to HMRC’s systems via an Application Programming Interface (API). Few software products meet these criteria, but HMRC has said it is working with developers to create more.

The primary purpose of MTD for ITSA is to make it easier and quicker for small businesses to comply with their tax obligations. With digital records, companies will no longer need to submit paper tax returns. Instead, they can submit their information directly to HMRC through their software.

In addition, MTD for ITSA will allow businesses to view their tax affairs online and track payments they have made to HMRC. This should make it simpler for businesses to manage their tax affairs and avoid errors that could result in them paying too much or too little tax.

 

What is changing under MTD for Income Tax?

The MTD for ITSA initiative is a key part of the government’s broader tax modernisation program. It will require businesses to use compatible software to keep their records and submit their tax returns to HMRC digitally via the MTD for ITSA service.

This is a significant change from the current system, where businesses submit paper returns or use bespoke software incompatible with HMRC systems. The shift in MTD for ITSA will simplify the tax return process and make it more efficient for businesses.

Several software packages are available that are compatible with MTD for ITSA, so you can choose one that best suits your needs. In addition, HMRC has also created a free Basic Tools software package that can be used to meet the requirements of MTD for ITSA. Need help with MTD? Profits Plus can help!

Who needs to comply with MTD for ITSA?

All individuals and businesses registered for self-assessment with HMRC must use compatible software to submit their tax returns. This includes sole traders, partnerships, landlords, and certain trusts.

What will I have to do under the new rules?

MTD for ITSA will affect how you:

  • keep your business records
  • send your Income Tax Self-Assessment returns to HMRC

You will need to:

  • Use accounting software or apps to keep your records digitally, including information about sales and expenses.
  • To comply with MTD for ITSA, you must use compatible software or an app to connect to HMRC systems. You can send information from your software or app directly to HMRC without using paper records or filling in online forms.
  • If you use an accountant, they must have appropriate MTD software to upload your returns to HMRC on your behalf.

Are there any exemptions from MTD for ITSA?

Regarding MTD for ITSA, yes, there are a few exemptions. These include:

  • Small businesses with an annual turnover below the VAT registration threshold (currently £85,000).
  • Businesses that only make exempt supplies (e.g., most financial services).
  • HMRC has granted businesses special permission (known as ‘conditional exemption’). For example, it’s not practical for you to use software to keep digital records or submit them — this may be due to your age, disability, location or another reason.

If you think you may be eligible for an exemption from MTD for ITSA, you can apply for an exemption. However, if you’re not exempt, you’ll need to sign up for MTD for ITSA. You also must tell HMRC within 3 months if the reason for your exemption no longer applies.

How is MTD for ITSA different from self-assessment?

Under the previous system, small businesses complete a self-assessment tax return (SA100) and submit it to HMRC by 31st January. This details their income and expenses for the previous tax year and calculates how much tax is due.

MTD for ITSA will be different in some ways. Firstly, businesses must keep digital records of their income and expenditure using software compatible with MTD. They must also file their return online rather than on paper.

The most significant change, however, is that businesses must submit their return quarterly rather than once a year. This means keeping on top of your finances throughout the year and ensuring you have enough money set aside to pay any tax due each quarter.

Overall, MTD for ITSA should make it easier for small businesses to stay on top of their taxes. However, the changes will require some initial adjustments and may mean higher costs for some companies regarding accounting software and fees.

What are the benefits of MTD for ITSA?

 

The are some advantages of integrating and using MTD for ITSA. Some of them are:

1. ITSA can automate and streamline the accounts filing process by integrating MTD. This can increase the organisation’s financial accounts’ accuracy, reliability, and compliance.

2. MTD can provide real-time visibility into finances, meaning business owners can quickly identify any financial discrepancies and adjust accordingly.

3. MTD provides a more secure way to store and manage data, helping protect an organisation’s sensitive information against theft or fraudulent activities like identity theft and phishing scams.

4. Automation through MTD can also reduce manual processes related to finance management, leading to greater efficiency and scalability for businesses of all sizes.

5. Integrating MTD with ITSA will give business owners access to up-to-date financial insights tailored to their specific needs, providing powerful tools for making sound decisions quickly in increasingly competitive markets.

What are the latest developments around MTD for ITSA?

The latest developments around MTD for ITSA are that the government has announced that it will be mandatory for all businesses to use MTD-compliant software. To remain compliant, businesses must ensure their accounting software is compatible with MTD.

In addition, the government introduced a new online service for filing tax returns, which came into effect in October 2019. This new service will make it easier for businesses to file their returns online and be compatible with MTD.

What is the MTD for ITSA timeline?

In April 2022, MTD became mandatory for all VAT-registered businesses. The next phase, Making Tax Digital for Income Tax Self Assessment (MTD for ITSA) was delayed to 2026 and will affect all self-employed people and landlords earning over £50,000 a year.

From April 2027, sole traders and landlords with a total annual income above £30,000 need to use MTD for ITSA-compatible software to keep digital records and file returns.

How to prepare for MTD for ITSA?

1. Understand the MTD for ITSA requirements. You can find these on the Gov.uk website. Check back often, as the rules may change over time.

2. Start getting organised. This means gathering all the relevant information and documentation you need come tax time – this will make things much easier!

3. Use accounting software. One of the best ways to prepare for MTD for ITSA is by using accounting software that is compatible with the system. This will make it much easier to submit your information and keep track of your progress throughout the year.

5. Stay up to date. Stay current on any changes or updates to the MTD for the ITSA system by checking the HMRC website or speaking with your accountant regularly. This way, you can be sure you are always compliant and ready come tax time!

Will I still be able to file paper returns?

No! As of April 2022, all VAT-registered businesses can no longer submit their VAT returns manually. Businesses are now required to use MTD-compatible software to file returns.

Do I need to store receipts and invoices digitally?

Under MTD, HMRC does not insist that you keep paper or scanned copies of your receipts. However, most accountants would recommend holding onto your receipts for 6-7 years still.

Can I submit a VAT return without MTD?

It is not possible to submit a VAT return without MTD. You must have a compatible software package to file MTD, as HMRC no longer supports non-MTD VAT submissions.

What happens if I miss an MTD deadline?

This will depend on the specific deadline you have missed. Generally, you may be liable to a penalty fee or interest charges if you fail to submit information or make payments by the relevant deadline set in the MTD regulations. In addition, HMRC could take further action depending on the severity of your breach of MTD regulations.

Can I appeal against the points or penalties for MTD?

You can appeal if you’ve been unfairly penalised for not complying with MTD for ITSA. You must write to HMRC explaining why you think the penalty is unfair.

To give your appeal the best chance of success, make sure you:

  • Include as much evidence as possible
  • Write a clear and concise explanation of your grounds for appeal
  • Include your full contact details

Once you’ve submitted your appeal, HMRC will review your case and get back to you with its decision.

Why has MTD been delayed?

This could be a result of several different factors. These could include difficulty obtaining and collecting data, technical challenges related to its implementation, or delays due to compliance with specific industry regulations.

Can I still use Excel for MTD?

If you are wondering if you can continue to use Excel for your MTD filings, the answer is yes! While the process may differ slightly, you can still use Excel to complete your MTD filings. Here’s a step-by-step guide:

1. First, download the MTD excel template from the HMRC website.

2. Enter your company name and VAT registration number into the template.

3. Fill in your total income and expenses for the reported period.

4. Finally, submit the completed template to HMRC via their online portal.

Why do I need to use MTD-compatible software?

Under the Making Tax Digital (MTD) initiative, businesses and sole traders with a taxable turnover above the VAT threshold of £85,000 will be required to use compatible software to file their VAT returns.

There are several reasons why you might need to use MTD-compatible software:

  • To meet the MTD criteria for filing your VAT return
  • To save time and money on your tax return
  • To make it easier to manage your finances
  • To get a better understanding of your tax affairs
  • To reduce the risk of human error when computing your tax return.

What MTD for ITSA software can I use?

A few different types of software are available: web-based, desktop-based, and mobile apps. Each has its features and benefits, so choosing the right one for your needs is essential.

Web-based software is accessed via a web browser on any computer or device with an internet connection. It’s usually the most affordable option and offers a range of features. However, you may need to be online, which isn’t always possible.

Desktop-based software is installed on your computer, and you can use it even if you’re offline. It tends to be more expensive than web-based software but offers more features and flexibility. So, if you frequently work offline or want more control over your data, this could be your best option.

Mobile apps are designed to be used on smartphones and tablets. They offer convenience and flexibility as you can access them anywhere. However, they may have different features than web-based or desktop-based software. Choose a mobile app if you need to be able to access your VAT return data on the go.

Which is the best free software for MTD VAT?

The best free software for MTD VAT will depend on your business needs and preferences. However, we recommend using Xero, QuickBooks, or FreeAgent as they are all compatible with MTD VAT. Xero and QuickBooks are popular cloud-based accounting software options compatible with MTD VAT, and they both provide a free trial. FreeAgent is an excellent choice for small businesses as it offers a free trial and is easy to use.

If you want to discuss your business requirements, get in touch; At ProfitPlus, we’d love to discuss how we can partner with you.

What is the easiest software for Making Tax Digital?

While many software options are available, the capabilities defer. Some are more user-friendly, some have more features, and some are more expensive.

The easiest software for MTD is probably Xero. It’s a cloud-based accounting software specifically designed for small businesses. It’s easy to use and has everything you need to comply with MTD. Plus, it’s affordable, starting at just £14 per month.

If you’re looking for an alternative to Xero, another option is QuickBooks Online. QuickBooks is another user-friendly cloud-based accounting solution with all the features you need to comply with MTD.

Will HMRC provide free software for MTD?

While HMRC provides some free software for taxpayers to use in complying with MTD for ITSA, this software is only available for a limited time, and certain taxpayers are eligible to use it. In addition, HMRC has commenced providing MTD software for VAT. However, software providers may offer free or discounted rates for their products to help small businesses transition to MTD, so it’s worth shopping around to see what’s available.

What is MTD for ITSA software?

If you are required to comply with MTD for ITSA, you will need to use software compatible with the initiative to submit your tax return. In addition, this software must connect to HMRC’s systems to submit your return electronically.

Several software providers offer compatible MTD for ITSA products, so you should compare different options before deciding which is appropriate for your business. You may also need to upgrade your existing accounting software to ensure it is compatible with MTD for ITSA.

If you still need to start using accounting software, you must choose and implement a suitable product before submitting your return under MTD for ITSA. The preferred software must connect to HMRC’s systems to submit your return electronically. You should consider several factors when choosing accounting software, such as cost, features, and ease of use.

Once you have chosen and implemented your software, you must register for MTD for ITSA with HMRC. You will then be able to submit your returns using the desired software.

How do you sign up for MTD?

To sign up for MTD, you must have your ITSA account information and your bank account information handy. Once you have this, you can follow the steps below:

1) Go to https://www.gov.uk/government/collections/making-tax-digital-for-income-tax

2) Scroll down to the ‘How do I sign up?’ section and select ‘Log in to HMRC online services

3) Enter your ITSA user ID and password when prompted

4) Click on the ‘Sign up for MTD’ link located under the ‘Return filings and payments’ heading

5) Follow the instructions on the screen to complete sign up

How long does it take to set up MTD for VAT?

Assuming you’re already registered for VAT, the first step is to sign up for MTD for VAT. You can do this through your tax account or commercial software.

Once you’ve signed up, you must let HMRC know which accounting period you want to keep your VAT records and reports under MTD. This information is found in your ‘VAT return.’

The next step is to activate MTD for VAT in your chosen software. Once done, you can start recording and storing your VAT data electronically.

HMRC should then send you a confirmation email within five working days, letting you know that your business is now set up for MTD for VAT purposes.

When do I need to sign up for MTD for ITSA?

HMRC has already standardised the MTD for ITSA, so we advise that all eligible businesses ensure they are registered in good time to ensure no delays in their filing requirements.

Can someone else sign me up for MTD for ITSA?

Someone else can sign you up for MTD for ITSA, but they’ll need your permission. So the first step is to go to the MTD for ITSA website and create an account. Once you have done that, you must provide basic information about yourself and your business. Only after that can you grant access to your account to whomever you’d like.

When must I file my final self-assessment tax return?

To comply with the new regulations, you must file your final self-assessment tax return by 31st January of every year. This is the deadline for paper returns, so now is the time if you still need to switch to filing digitally.

When do I need to start preparing for MTD?

As soon as possible! It is recommended that businesses start their transition to MTD ASAP by ensuring they have appropriate software in place, understand the compliance obligations under MTD, and take advice from professional advisors where needed.

Can my accountant sign up for me?

Yes, your accountant can sign you up for MTD on your behalf. However, they must have HMRC Online Services access to do so. If they don’t have access, you’ll need to provide them with your HMRC Online Services username and password so they can sign in and access your account.

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