MTD for Income Tax (Making Tax Digital) will become compulsory soon. You will probably be wondering: What is MTD for Income Tax? Does MTD for Income Tax apply to me? When will MTD for Income Tax start? What do I need to do for MTD for Income Tax? This post will address all of your questions about Making Tax Digital for Income Tax.

MTD for Income Tax

What is MTD for Income Tax?

MTD stands for Making Tax Digital. It already applies to VAT returns. Soon, MTD will apply to Income Tax. Under MTD, HMRC requires businesses to keep digital records of their transactions. Then those businesses need to submit the totals of the transactions to HMRC using software. There must be a digital link between the transactions and the totals submitted to HMRC. Digital link means that you can’t re-enter or copy and paste amounts, the software must be ‘attached’ to the total of your transactions. You can still have paper invoices and receipts, but you will need to enter them into accounting software or a spreadsheet with a formula for the totals i.e. =sum(cell:cell).

How often are MTD reports required?

For Income Tax, the MTD returns will be quarterly and annually. All businesses will need to prepare reports to the tax year (5th April) and the tax quarters (5th July etc). There will be an option to change these to the month end just before those dates (31st Mar, 31st Jul etc).

Does MTD for Income Tax apply to me?

MTD for Income Tax will apply to most sole traders and many landlords. However, sole traders and landlords will be exempt if annual sales/rents are less than £10,000. The limit is per person, so if a property is jointly owned, you can halve the rental income when testing for the £10,000 limit. When testing the £10,000 limit for a particular tax year, you need to go back 2 years. So use your income that was included on the tax return that was due just before the tax year starts. So your income for the 2021/22 tax year will determine whether you are exempt or not for the 2023/24 tax year. That’s because it’s due by 31st January 2023, a few months before the start of 2023/24.

If annual sales are less than the VAT registration threshold (currently £85,000), only two amounts will be required. They are total income and total expenditure. However, you should also keep categorised totals to help check that there are no errors or omissions. Balance sheet amounts are not required.

When will MTD for Income Tax start?

Unless you are exempt, you will need to comply from 6th April 2024. The first quarter ending 5th July 2024 will need to be submitted by 5th August 2024. The returns and deadlines will be quarterly thereafter. The first End Of Period Statement (EOPS) will be for the year ending 5th April 2025 and will be due by 31st January 2026.

What do I need to do for MTD for Income Tax?

Change your year end to 5th April or 31st March

All sole trader businesses and landlords will need to prepare accounts to the tax year 5th April. There will be an option to change this to 31st March. If you currently prepare accounts to a different date, you will need to have a long period to change it to the tax year as soon as possible.

Get your Overlap Relief for MTD

If you need to extend your accounting period to end on the tax year end, it may mean that you have a higher tax bill than expected. However, you will be able to claim overlap relief. when you first started trading you will have had some profits taxed twice due to an overlap of periods. That’s because the first year would have been taxed up to the tax year end, the second year will have been taxed to the full accounting year end. You will be able to claim overlap relief which will reduce your taxable profit. You will need to contact HMRC to ask for the amount of your overlap profits, unless you or your accountant has a note of it.

Use Accounting Software for MTD

The easiest way to comply with MTD is to start using accounting software, such as Pandle (free or we can get Pandle Pro for £2.50pcm). Xero, QuickBooks and FreeAgent are other good options. After entering or importing your bank transactions, you just need to categorise each one. You can import using a CSV bank statement or an automatic bank feed. Then at the end of every quarter you will be able to simply click a few buttons to submit your MTD update to HMRC.

Or use Bridging Software for MTD

If you don’t want to use full accounting software, you could use a spreadsheet together with bridging software that will submit the totals of your spreadsheet to HMRC. You will need to direct the bridging software to the correct totals on your spreadsheet every quarter.

Retailers Need Daily Records for MTD

If you have a retail business, you don’t need a digital link back to every individual sale. However, the digital links must start from daily sales totals, not weekly and not monthly.

Keep separate records for separate businesses

If you are a landlord and have a trading business, your landlord records will need to be separate from your trading records. If you have more than one trade, you will need to keep separate digital records for each trade.

Cash or Accruals Basis for MTD

Quarterly updates can be on either the cash or accruals basis. If you qualify to use the cash basis, you can use the cash basis for The End Of Period Submission (EOPS), or you can use the accruals basis. The EOPS doesn’t have to be on the cash basis if the quarterly updates are cash. You adjust the EOPS with accounting adjustments (such as private use adjustment), so it will be different to the totals of the 4 quarterly updates.

Can I avoid MTD for Income Tax?

Not unless you are exempt – see above Does it apply to me section. You could transfer everything to a company. However, you may have to pay capital gains tax and companies are also in the pipeline for MTD but not until 2026 at the earliest.

Can accountants submit MTD returns?

Yes, we already submit MTD VAT returns and we will be offering to submit quarterly and annual MTD for income tax reports. Sole traders will need to be on our Quarterly packages. Landlords will need to be on our Investor+ tax return package. Click below for our prices and an instant quote.