What is MTD for ITSA and will it affect you?

This is Making Tax Digital for Income Tax Self-Assessment and is being rolled out from April 2024. This will see some people who are currently filing an annual self-assessment tax return having to move to MTD ITSA and in doing so will be required to file quarterly updates of income and expenditure, together with an end of period statement plus the normal tax return meaning they will move from filing one to a minimum of 6 returns per year.

Not everyone who currently files a self-assessment return will need to do this, the focus is on the self-employed and those with property income. To be within the scope of MTD for ITSA, an individual must have qualified income above £10,000 per year. But how will this income threshold work in practice?

When applying the income threshold for any specific tax year, HMRC will look at the tax return that has been filed for the previous tax year. So, for example, for 2024/25, the first tax year for which MTD for ITSA will be mandatory HMRC will look at the figures for the return for 2022/23, which has a filing deadline of 31st January 2024.

A couple of important things to note:

■ Qualifying Income applies to gross income or turnover, not just the profit.

■ Where the individual has more than one trade or property business. For example, if the individual has £8,000 of sales from a sole trader business and £4,000 of rental income, their total income from these sources would exceed the limit and therefore be mandated.

Which figures will HMRC look at?

HMRC have indicated they will look at a number of SA return boxes in applying the £10,000 test these are listed below:

■ Self-Employment Turnover – either SA103F – Box 15 or SA103S – Box 9 or SA200 box 3.6

■ Self-Employment Other Income – either SA103F – Box 16 or SA103S – Box 10

■ UK Property Income – either SA105 Box 20 or SA200 box 6.1

■ Other UK Property Income (grant of lease) – SA105 Box 22

■ Other UK Property Income (reverse premiums) – SA105 Box 23

■ Other UK Property Income (FHL) – SA105 Box 5

■ Foreign Property Gross Income – SA106 Box 14

■ Foreign Property Income (premiums) – SA106 Box 16

The figures reported in these boxes will be combined and, if the total exceeds £10,000, the taxpayer will be mandated into MTD for ITSA from the start of the next tax year following the filing deadline for the return in question. Income which is not declared on the SA return will not be considered when applying the £10,000 threshold. This means that rent a room receipt below the £7,500 threshold, or trading or property income below £1,000 where the trading/property allowance is claimed, will not count towards the threshold, provided these figures haven’t been included on the tax return. For example, an individual with £9,000 of trading income and £6,500 of rent a room income will not be mandated into MTD for ITSA, as rent a room receipt of less than £7,500 do not need to be reported in their tax return and therefore ignored for the purposes of the threshold test.

However, if the individual is mandated into MTD for ITSA because they have other income which takes them above the threshold, they will be required to account for all of their property or trading income under MTD. This means that, for example, an individual with trading turnover of £15,000 and rent a room receipt of £5,000 will have to meet the MTD requirements for both their trade and their property income.

What about new trades or businesses?

If a source of trading or property income starts part way through a tax year HMRC will annualize the turnover data and gross it up to give an amount for the full tax year. For example, if a trade starts at the beginning of January and has turnover of £4,000 to 5 April, (a quarter of the year) that will be annualized to give a figure of £16,000 for the purposes of the threshold test. This method of annualizing may not be a reasonable approach for some businesses especially if their income is seasonal. The MTD regulations do provide for an alternative approach of applying a just and reasonable method if annualizing ‘would work unreasonably or unjustly’ however HMRC have not yet confirmed how this will work.

What if income falls below the £10k threshold in future years?

Once an individual is mandated into MTD for ITSA, they will only become exempt when their qualifying income falls below £10,000 for three consecutive tax years (based on filed tax returns, or quarterly updates where the deadline has not yet passed for filing the return for a year).

For example, an individual has the following qualifying income:

■ 2022/23 – £12,000

■ 2023/24 – £9,000

■ 2024/25 – £5,000

■ 2025/26 – £5,000

■ 2026/27 – £3,000

This individual will be mandated into MTD for ITSA from 2024/25 as the income threshold is applied to the income on their 2022/23 tax return was over £10,000 It does not matter that their income in 2023/24 was below the threshold.

They will then have to file returns under MTD ITSA for three years, if during those years as the example above shows, their qualifying income was less than £10,000 then the earliest tax year this individual can be exempt from MTD for ITSA is 2026/27.

Depending on the facts and circumstances, it may be possible to apply for exemption on the grounds it is ‘not reasonably practicable’ to comply with MTD provided they meet the requirements set out by HMRC which are:

■ It is not practical for you to use software to keep digital records or submit them, this may be due to age, disability, location or another reason.

■ You are a practicing member of a religious society whose beliefs are incompatible with using electronic communications or keeping electronic records.

You will need to explain how these reasons apply to your personal circumstances, if HMRC has already granted you an exemption for MTD for VAT then for one of these reasons you will not need to apply.

HMRC will consider the information you send to them and either grant the exemption or tell you that you are not exempt you can appeal their decision. It is important to note that if the reason for your exemption no longer applies you must inform HMRC within 3 months.