Making Tax Digital for Income Tax: What You Need to Know
HMRC’s Making Tax Digital (MTD) initiative continues to expand across different tax types, with Income Tax Self Assessment set to be the next major implementation. This represents a significant shift in how individuals and businesses will need to manage their tax affairs, moving from annual submissions to quarterly digital reporting.
What is Making Tax Digital for Income Tax?
Making Tax Digital for Income Tax will require eligible taxpayers to keep digital records and submit quarterly updates to HMRC throughout the tax year, rather than filing a single annual Self Assessment return. The system aims to make tax administration more efficient and reduce errors through real-time reporting.
Unlike the current system where you submit your Self Assessment by 31 January following the tax year end, MTD for Income Tax will require quarterly submissions by specific deadlines, with a final declaration still due annually.
Who Will Be Affected?
The rollout will be phased, starting with businesses and landlords with annual income above certain thresholds. Initially, sole traders and partnerships with business income over £30,000, and landlords with property income over £30,000, will be required to join the system.
The scope is expected to expand over time to include more taxpayers, with thresholds potentially being lowered and additional income types being brought into scope. Employees with only PAYE income are unlikely to be affected in the early phases.
Key Changes for Taxpayers
The most significant change is the shift from annual to quarterly reporting. Taxpayers will need to submit updates by the end of the month following each quarter (31 July, 31 October, 31 January, and 30 April). These updates will include income and allowable expenses for the quarter.
Digital record-keeping becomes mandatory, meaning paper-based systems will no longer be acceptable. All business records must be kept digitally, either in accounting software or spreadsheets that can link to HMRC’s systems through Making Tax Digital compatible software.
Software Requirements
Taxpayers will need to use MTD-compatible software to submit their quarterly updates. This software must be able to connect directly to HMRC’s systems through Application Programming Interfaces (APIs). Free software options are available, though many taxpayers may find paid solutions offer better functionality.
The software must be capable of recording income and expenses, calculating profits, and submitting the required information to HMRC. It should also maintain the digital link between record-keeping and submission to comply with MTD requirements.
Preparing for Implementation
Early preparation is essential for a smooth transition. Start by reviewing your current record-keeping systems and identifying any gaps that need addressing. If you’re currently using paper records or basic spreadsheets, you’ll need to transition to MTD-compatible software.
Consider your quarterly reporting capability and whether you have the systems and processes in place to gather the necessary information every three months. This may require changes to how you track expenses and income throughout the year.
Professional Support
Given the complexity of the changes, many taxpayers will benefit from professional support during the transition. Accountants can help select appropriate software, establish new processes, and ensure compliance with the new requirements.
The quarterly reporting requirements mean that tax planning becomes more dynamic, with opportunities to make decisions throughout the year based on real-time information. This can actually provide benefits in terms of better cash flow management and tax planning opportunities.
Timeline and Next Steps
While the exact implementation timeline continues to evolve, it’s important to start preparing now. HMRC typically provides advance notice and pilot programs before full rollout, giving taxpayers time to adapt their systems and processes.
Stay informed about developments through HMRC announcements and consider attending information sessions or webinars about MTD for Income Tax. Early preparation will help ensure a smoother transition when the requirements become mandatory.
This article provides general guidance based on current proposals for Making Tax Digital for Income Tax. Requirements may change as HMRC finalises implementation details. Please consult with a qualified accountant for advice specific to your circumstances.
