Making Tax Digital for Income Tax Self Assessment (MTD ITSA) is coming, and Clear Books is here to help you prepare for the changes.

If your business is VAT registered, you will already be familiar with MTD, the government’s initiative to digitise record keeping and increase reporting for businesses in the UK. 

But VAT was just the first stage of the rollout – next on the horizon is MTD ITSA.

In this FAQs guide, we’ll help you understand who is impacted by MTD ITSA, when the changes are coming and what you need to do now to prepare for the changes.

What is MTD ITSA?

MTD ITSA is a new way for self-employed business owners and landlords to digitally report earnings and pay Income Tax. 

When it comes into effect, it will replace the annual Self Assessment Income Tax return.

Who will be impacted by MTD ITSA?

MTD ITSA will impact those who run their own business or let out property.

This is a huge change, affecting around 4.2m taxpayers with business and/or property income over £10,000, including landlords, sole traders and partnerships, will be affected by the change. 

Check out our guide specifically for landlords.

Accountants and tax agents completing and submitting Self Assessment tax returns on behalf of their clients will also be impacted by the change, as they will be required to use HMRC recognised software to submit the returns.

When will I need to comply with MTD ITSA?

 MTD ITSA will be rolled out in two stages, depending on your business position:

  • April 2024 – MTD ITSA rules will apply for self-employed business owners and landlords 
  • April 2025 – MTD ITSA rules apply for partnerships with individual partners 

Limited liability partnerships (LLPs) and partnerships with corporate partners will eventually be required to submit returns via MTD ITSA, but the date for this hasn’t yet been confirmed.

MTD ITSA was due to begin in April 2023, however in September 2021 HMRC confirmed that it would be delayed until April 2024. This was to give landlords and self-employed people more time to prepare for the changes due to the pandemic.

Will there be any changes to the Self Assessment tax return?

Along with submitting returns digitally, there will also be changes to the way Income Tax returns are managed.

The end of period statement, and the final declaration 

After the end of the year, the end of period statement (or EOPS) must be made for each income type. This will represent the final numbers for income and expenses, among other pieces of information, that make up what used to be the SA103, SA105, and SA106 forms.

Following the EOPS, the final declaration will be the submission that finalises your tax position for any one tax year. This will replace the annual Self Assessment tax return. 

The final declaration takes into account all sources of chargeable income and gains, and collates all the data that you need to provide to HMRC for them to reach their final tax liability for the tax year. 

The final declaration is also the time that most formal claims for reliefs and allowances and any deductions will be made, where these were previously included within a Self Assessment tax return.

Quarterly updates

In addition to the annual submission, you will also be required to send business and property income and expenses updates to HMRC on a quarterly basis. 

Digital record keeping 

Another key change is the requirement to keep digital records. 

For MTD ITSA, a digital record is simply a computerised version of an item of data, such as a business address, a ledger, or a payment to a supplier.

MTD also mandates by law that businesses must keep and maintain digital records for most things relating to tax. This means that the majority of traditionally paper-based processes involved in accounting will no longer be permitted.

What will I need to do to comply with MTD ITSA?

From April 2024, all affected self-employed business owners and landlords will need to:

  • Make sure they have signed up for MTD for Income Tax via HMRC’s website, their accountant, or MTD-compatible software
  • Keep digital business records
  • Use MTD-compatible accounting software like Clear Books 
  • Send quarterly business income and expenses updates to HMRC through the software
  • Complete the end of period statement, and then final declaration, to finalise the end-of-year position for tax and determine what is owed 
  • Submit this final declaration to HMRC via the software

What do I need to do now to prepare for MTD ITSA?

Whilst the rules will not come into force until April 2024 (or April 2025 for partnerships with individual partners), there will still be some work to be done before this deadline to ensure you’re compliant from when the rules come into effect.

If you are an individual, a good start would be to make sure you understand how the existing process will change when it’s digitised and that you understand digital record keeping. There’s no harm in starting to keep digital records now, with software like Clear Books, to be prepared for the upcoming changes.

If you’re an accountant, you need to take a thorough look at your client base so you understand how many clients will be affected, and that they understand the changes.

You will also need to make sure you find a software solution that is easy-to-use and works for you and your clients.

What are the benefits of MTD?

Changing any business process can be a big adjustment, particularly anything that’s legally mandated and concerns tax, as you want to be sure you’re getting it right.

MTD ITSA builds on the successful introduction of MTD VAT, which initially affected VAT-registered businesses with taxable turnover above the VAT threshold in April 2019, and was later introduced for all VAT-registered businesses in April 2022. 

Businesses already complying with MTD rules have reported that they find preparing and submitting returns easier, and that MTD has increased their confidence in managing tax affairs and using technology.

Clear Books’ VAT return wizard gives users confidence that they are getting it right. It helps Clear Books users by guiding them through the process step-by-step, and highlighting when any information is missing.

Clear Books’ MTD insights

Head to our MTD hub for all our latest MTD news, product updates and insights – and register for our updates to make sure you’re the first to know of any changes. 

Not using Clear Books? Get started today with a free 30-day trial to see just how easy it is to use our HMRC recognised software.

Posted by Clear Books