Making Tax Digital for Income Tax Self-Assessment
It comes into effect in April 2026 for businesses, self-employed individuals and landlords with an income over £50,000. It comes into effect a year later for businesses that earn over £30,000. Businesses can voluntarily join the MTD scheme earlier if they wish. Those with incomes below these thresholds have the option of continuing to use the existing self-assessment system or using the MTD system. Partnerships will be required to join MTD at a later date.
The thresholds apply to the gross income or turnover of the business and not its profit. The gross income of all businesses in one entity is to be combined when considering these thresholds. For example, if the business of a sole proprietor earns £40,000 gross in a year, and property rental income of £12,000 is received, this gives a combined gross income of £52,000. As this exceeds the MTD threshold, MTD-compatible software is required to be used. Separate records and separate submissions must be made for each business even if these are below the MTD thresholds. Where property income is received from more than one property, all properties that are in the UK are treated as one UK property business. All those outside the UK are treated as one overseas property business.
Businesses do not need to follow the MTD rules if:
it is not practical for them to use digital tools to keep digital business records due to age, disability, remoteness of location or any other reason
the business is subject to an insolvency procedure
the business is run entirely by practising members of a religious society or order whose beliefs do not permit the use of electronic devices.
Exemption from MTD is also allowed for:
trusts
tstates
trustees of registered pension schemes
non-resident companies.
Applications need to be made to HMRC to claim exemption.
Benefits MTD will remove the need to submit the current annual returns. It requires a computerised system that keeps your tax affairs up to date constantly using MTD-compatible software. Businesses will need a computer software system that is compatible with MTD, and most accounting software suppliers will provide versions that are MTD-compliant. HMRC is working to ensure that free MTD-compliant software will be available for businesses with simple accounting systems.
Software packages will keep the digital records and submit tax returns to HMRC. It is expected that this will also improve cash flow visibility and highlight the amount of tax that is owed so businesses can set aside the amount needed. These systems will automate a number of tasks to reduce the possibility of human error and will connect with the business’s accountant’s systems to improve communication and transparency. MTD will also allow the capture and digitisation of receipts using mobile apps, which should reduce administration and errors.
MTD requirements The prime requirement is that MTD-compliant software is used. This must allow:
the creation and storage of digital records
the business to send updates of the totals of business income and expenses every three months
the confirmation of End of Period Statements.
A final declaration is also required. This can be either through the MTD-compliant software or the HMRC online service account.
Self-assessment changes For each business, a quarterly update will be required to be submitted (or more frequently if desired). This includes a quarterly update for any rental income. The quarterly updates follow the tax year, not the business’s accounting period.
The standard quarterly periods and deadlines are as follows.
Quarterly period | Quarterly deadline |
6 April to 5 July | 5 August |
6 July to 5 October | 5 November |
6 October to 5 January | 5 February |
6 January to 5 April | 5 May |
It is expected that an option will be introduced at a later date to use calendar quarters. If calendar quarters are used the periods will be as follows.
Quarterly period | Quarterly deadline |
1 April to 30 June | 5 August |
1 July to 30 September | 5 November |
1 October to 31 December | 5 February |
1 January to 31 March | 5 May |
These quarterly updates will not include adjustments for assets or reliefs that apply at the year-end. As a declaration is not being made there are no penalties for inaccuracies.
An End of Period Statement must also be made for each business owned and for property income. This is to include any adjustments that are needed. Adjustments can include accounting adjustments for accruals and prepayments, adjustments for disallowable expenses, claiming reliefs and allowances and for any elections that are to be made. As is currently the case, complex calculations made need to be made for leases, asset depreciation, R&D, etc and help may be required from the business’s accountant.
By 31 January each year, a single final declaration needs to be made for all income. This will “crystallise” the business’s tax position. The software will allow the business to see the final income tax estimates that have been calculated by HMRC. This will include information regarding income, expenses and allowances that HMRC has been told about. This will then require a final declaration to combine all the information from the business and properties as provided by the quarterly updates and End of Period Statement plus any income that is outside MTD, for example, dividends and interest.
A lot of these tasks will be automated by the MTD-compatible software and it is expected that the administrative burden will reduce compared to the current self-assessment system.
Agents The business can authorise its agent to make MTD returns. This also authorises HMRC to exchange data with the agent. The agent can sign the business up for MTD, use the MTD software to create records, edit and store them and send the data to HMRC. An agent currently authorised for self-assessment will not need to be re-authorised for MTD.
Contact Ashored for more information and support with Making Tax Digital.
