The post-Autumn Budget 2024 headlines were dominated by news of inheritance tax and capital gains tax changes, the increase to employers’ NICs and confirmation that VAT will indeed be introduced on private school fees.
Many other announcements went largely unreported, including government plans – before the end of this parliament – to extend Making Tax Digital for Income Tax Self Assessment (MTD for ITSA)requirements to businesses and landlords with gross trading or gross rental income of £20,000-£30,000, following many years of uncertainty.
This will impact a huge additional number of freelancers, sole traders and small private landlords, some of whom will need to get used to using accounting software for the very first time. Many of them have no idea what is heading their way and how it will affect them, which is where accountants can make a difference, of course.
Get your clients ready for MTD for ITSA
Since it was first announced in 2015, introduction of MTD for ITSA has been delayed four times, however, the first phase of introduction looks certain to happen on 6 April 2026. From that date, sole traders, freelancers and landlords with a gross trading or gross rental income of over £50,000 must comply with MTD for ITSA requirements.
Earlier this year, HMRC was calling for accountants to sign up their clients for inclusion in its expanded private beta MTD for ITSA test trial, which it relaunched on 22 April 2024. From 6 April 2027, sole traders, freelancers and landlords with a gross trading/rental income of £30,000-£50,000 will need to comply with MTD for ITSA rules.
That may still seem like a long way off, but it wouldn’t be wise to leave researching your MTD for ITSA software options too late. Moreover, it’s not just about deciding which MTD for ITSA software (or bridging software) you’re going to use, your clients must also get used to using it, as per MTD for ITSA reporting requirements. That can take time. It would be wise to begin raising awareness of MTD for ITSA as soon as possible, while telling your clients when and how it will affect them
What will change under MTD for ITSA?
Time for a quick recap. When introduced, under MTD for ITSA, many sole traders and landlords will have to keep digital financial records. They’ll either need to use MTD-compatible accounting software or bridging software that allows MTD reporting using their existing accounting software (if they use it).
Then, every three months, the software will create quarterly updates, summarising your sole trader/landlord client’s income and expenses. After submitting an update to HMRC, an estimated tax bill will be shown, which will hopefully better enable your clients to budget for paying their tax bill.
After the fourth quarterly update, income and expense figures for the whole tax year will be shown within the software. Adjustments can then be made and once the figures have been totalled, an updated tax bill estimate will be shown. To finalise their Income Tax position, where relevant, clients must provide HMRC with details about other taxable income.
A final declaration can then be made via the software, confirming that the information provided is accurate and complete. The final declaration must be made by 31 January following the end of the tax year. HMRC will then work out your client’s final tax bill.
The benefits of MTD for ITSA
If your clients are already using accounting software, MTD for ITSA’s introduction shouldn’t cause them or you much of a problem. It’s likely to prove a far bigger challenge for “shoebox clients” who don’t use accounting software and who are chaotic rather than organised when it comes to their finances. But, MTD for ITSA is not something they can ignore.
And in reality, accounting software is easier to use than some people believe. As you know, it can be linked to bank and credit card accounts, which saves an awful lot of hard work. And having to fully update their financial records, at least every quarter, gives users a reliable idea of their business or landlord finances, which potentially offers them more knowledge and control. They’ll also be able to say goodbye to the shock of getting an unexpectedly high tax bill. That’s much worse than having to use accounting software.
● HMRC has published updated guidance on how to “Sign up your client for Making Tax Digital for Income Tax”.
