Despite being delayed several times, Making Tax Digital for income tax self-assessment (MTD for ITSA) is set to streamline the tax filing process, making it more efficient, accurate, and easier for businesses to manage their tax obligations.

This blog provides a step-by-step guide to help businesses transition smoothly to MTD for ITSA. Let’s get started.

Understanding MTD for ITSA

MTD for ITSA is part of the Government’s broader Making Tax Digital initiative, which is aimed at digitalising the tax system for UK taxpayers.

Under MTD for ITSA rules, self-assessment customers, including the self-employed and landlords, must use software to keep digital records and send updates to HMRC.

The primary goal of MTD for ITSA is to reduce errors, make tax administration more efficient, and ensure taxes are paid correctly and on time.

Step 1: Determine if your business will be affected

MTD for VAT was introduced in 2019 for some businesses and extended to all VAT-registered businesses in 2022. In 2024, the MTD initiative applies exclusively to VAT-registered businesses.

Looking ahead, MTD for ITSA is set to launch in April 2026 with a phased approach.

Initially, only sole traders and landlords with annual earnings over £50,000 will need to comply with MTD for ITSA rules. This will expand in April 2027 to include those earning above £30,000.

The Government has indicated that MTD for ITSA will not apply to general partnerships and small businesses earning below £30,000 yet, though this is subject to change.

Recent updates include a delayed rollout of MTD for ITSA and adjustments to the scheme’s requirements announced in the 2023 Autumn Statement.

Additionally, MTD for corporation tax is on the horizon, with specific dates yet to be announced by HMRC.

Step 2: Choose compatible software

Once you’ve determined that your business is within the scope of MTD for ITSA, the next step is to select HMRC-compatible software.

Self-assessment customers must use this software for keeping digital records and submitting tax returns. The spectrum of available software spans from elementary tax return applications, such as TurboTax or Taxfiler, to all-encompassing accounting suites like QuickBooks, Xero, or Sage.

Choose software that suits your business needs and budget, and ensure it’s compliant with MTD for ITSA requirements.

Step 3: Digital record keeping

MTD for ITSA mandates that businesses keep digital records of their income and expenses. This doesn’t mean you need to digitalise receipts and invoices, but the transaction data must be stored digitally.

Implement processes to maintain digital records from the start of your accounting period. This will ensure compliance and make the transition smoother.

Step 4: Register for MTD for ITSA

Businesses must register for MTD for ITSA through the HMRC website. The registration process involves providing details about your business and verifying your identity.

We’d recommend registering well before your first digital tax return is due to avoid any last-minute issues.

Step 5: Submit your tax returns using MTD for ITSA

Finally, you’ll need to submit your tax returns using the compatible software you’ve selected. Your software will help you to:

  • keep track of your income and expenses throughout the year
  • send quarterly updates to HMRC
  • calculate your tax liability and send a final declaration to HMRC.

Regular submissions and updates are required, so familiarise yourself with the software’s reporting features and the MTD for ITSA rules and deadlines.

Getting support

Transitioning to MTD for ITSA may seem daunting, but there is plenty of support available. Software providers often offer tutorials and customer support to help you get started. Additionally, HMRC provides guidance and resources to assist businesses in making the transition.

Accessing personal tax services and professional advice from an accountant or tax adviser can also be invaluable, especially for those with complex tax affairs or businesses seeking to optimise their tax strategies within the new digital framework.

The final analysis

Making Tax Digital for income tax self-assessment represents a significant shift towards a more digital, efficient, and transparent tax system in the UK.

By following these steps and seeking the necessary support, businesses can transition smoothly to MTD for ITSA, ensuring compliance and taking advantage of the benefits of digital tax management.

Remember, preparation is key to a successful transition, so start planning early and talk to your accountant to make the most of this change.

Need assistance with MTD for ITSA? Contact us today.