The Making Tax Digital (MTD) for Income Tax Self-Assessment (ITSA) has been deemed as one of the largest changes ever made to UK tax legislation. Previously set to become effective in April 2024, this MTD mandate has already been postponed thrice until April 6, 2026. This was a necessary move from HMRC to reduce the significant burden placed on business owners due to the present economic crisis.
But what exactly is MTD for ITSA? And why is it important that small business owners are aware of it? This guide will provide you with all the necessary details about MTD, its postponement, and the changes brought about by the mandate.
What is Making Tax Digital for Income Tax Self-Assessment?
Making Tax Digital is a UK government initiative aimed at fully digitizing the country’s tax system. MTD for VAT has already been launched, and MTD for ITSA is expected to follow suit. Currently, small businesses and self-employed persons are required to submit their taxes to HMRC annually, retaining their books’ records on either digital or paper format.
However, under the new mandate, taxpayers filing their ITSA will require keeping digital records of their earnings and giving quarterly updates. Notably, the mandate will not be affecting all small businesses right away. Only business owners and self-employed individuals earning over £50,000 each year are required to join MTD for the first year of its implementation.
Then, the following year, anyone earning over £30,000 will join the mandate. In 2023, a review of the impact of the new digitized system will be conducted to examine how MTD can be of benefit to those earning less than £30,000.
The new penalty system for late payments has also changed. The new procedure applies points for late payments, and taxpayers receiving ITSA quarterly must accrue four points before facing a penalty, which will be a fine of £200.
Why was MTD postponed?
The postponement of MTD for small businesses was done due to the significant pressure the current economic crisis places on business owners. Having to learn a completely new system to file their taxes will not be easy for many business owners and self-employed individuals.
In an official statement, Financial Secretary to the Treasury, Victoria Atkins, stated, “It is right to take the time to work together to maximize the benefits of Making Tax Digital for small businesses by implementing the change gradually. It is important to ensure this works for everyone: taxpayers, tax agents, software developers, as well as HMRC.”
What changes can we expect from MTD for ITSA?
When MTD for ITSA was first announced, all taxpayers earning over £10,000 annually were supposed to begin submitting all their books digitally in 2024. HMRC, however, changed the financial threshold, aligning it with their decision to ease the burden on self-employed persons, small businesses, and landlords.
Therefore, from 2026 and moving forward, only those earning above £50,000 annually will be required to join MTD. In 2027, those earning above £30,000 will be required to join, and a review of the digitized system will be conducted to determine how MTD can benefit business owners earning less than £30,000.
It is advisable to start thinking about the changes that your business may need to make despite the postponement of MTD. Digitalizing your income and finances can bring numerous benefits, from improved profitability and task efficiency to more informed decision making and reduced error margins.
How can I prepare for MTD for ITSA?
If you are irrespective, you can prepare your business for MTD by seeking advice and tips from tax professionals. You may also find useful tools on Sage’s Making Tax Digital hub, where you can learn and prepare for an easier transition to the new system.
Despite the postponement, it is essential to bear in mind that effective bookkeeping, often through automated means, is an essential aspect of your business’s compliance in the long term.
Moreover, digitalizing records will simplify paperwork and error reduction, improve profitability, and enhance task efficiency, all of which can help grow your business.
To conclude, MTD for ITSA is a significant change to the UK tax legislation aimed at fully digitizing the tax system. Although the mandate has been postponed to 2026, it is crucial to start preparing your business for the transition to avoid rushing to understand a new system.
By seeking advice and utilizing digital tools and resources, you can make the transition smooth and beneficial to your business operations. Take the time to prepare well, as the digitization of records aims to simplify paperwork, reduce errors, improve profitability, and enhance task efficiency.
