SO, WHAT SHOULD YOU DO?

IN DECEMBER 2022, the government announced its decision to delay introducing Making Tax Digital for Income Tax Self Assessment (MTD for ITSA) for two more years until April 2026.

The government says it has done so because it understands that the UK’s 3.1m sole traders (aka self-employed) and its 2.66m private residential landlords are “currently facing a challenging economic environment, and the transition to Making Tax Digital for Income Tax Self Assessment represents a significant change [for] taxpayers and HMRC for how self-employment and property income is reported.”

The delay has been welcomed by business groups and professional tax and accountancy bodies, reportedly with both voluntary sign up to the Making Tax Digital for Income Tax Self Assessment pilot scheme and awareness of MTD for ITSA among UK sole traders and landlords very low.

Latest MTD for ITSA changes

As well as the two-year delay in introducing the first phase of Making Tax Digital for Income Tax Self Assessment, the government has also increased the taxable income threshold, meaning it will impact far fewer Income Tax payers when first introduced, while many others won’t have to comply with the requirements for some years yet.

Changes that were planned for introduction in April 2024 would have affected sole traders and landlords with taxable income of more than £10,000 a year. However, from April 2026, only those with taxable income of over £50,000 in a tax year will be mandated to maintain digital records of their income and costs and provide quarterly summary updates to HMRC using MTD-compatible software (or MTD bridging software that enables them to carry on using their existing accounting software).

Those with a taxable income of £30,000-£50,000 will need to comply with MTD for ITSA requirements from April 2027 (unless more changes are made!).

What if your taxable income is below £30,000 a year?

The government also announced plans to conduct a review into the recording and reporting needs of businesses with taxable income of less than £30,000 a year, which will include a large proportion of UK sole traders, saying it wants to enable smaller businesses to more easily manage their Tax obligations. This review will inform further stages of MTD for ITSA after April 2027.

Whether private residential landlords with taxable income below £30,000 a year will need to comply with rules before sole traders isn’t clear. However, the planned extension to include members of ordinary business partnerships in 2025 has been scrapped, although no new date has yet been announced.

MTD for ITSA recording and reporting requirements

Under MTD for ITSA requirements, sole traders and landlords must maintain digital records of their income and costs and digitally send a quarterly summary to HMRC using MTD-compatible software. They can use bridging software that enables them to comply with MTD reporting requirements while using their existing accounting software (including basic spreadsheets).

They’ll then get an estimated tax bill, based on the information they’ve provided. HMRC believes this will enable sole traders and landlords to better budget to pay their Income Tax tax bills when required.

At the end of the year, sole traders and landlords must digitally submit a statement to HMRC, confirming the figures they’ve submitted, with any accounting adjustments made. They must also make a final declaration, confirming any other income received. They won’t need to file a Self Assessment tax return if they don’t have any other taxable income to report. HMRC will then tell the sole trader or landlord how much tax they owe, which they must pay by 31 January in the following tax year.

When should you sign up?

Ahead of the new April 2026 deadline, sole traders and landlords with taxable income of more than £50,000 a year can voluntarily sign up and start using the new digital recording and reporting methods. HMRC believes it’s a good way for sole traders and landlords to get used to the new MTD requirements long before they become mandatory.

• To sign up, you must be a UK resident, registered for Self Assessment, whose tax year runs from 6 April to 5 April.

• You must also have already filed at least one Self Assessment tax return and all of your tax bills to date must have been paid.

• Obviously, you’ll need to buy compliant software or bridging software (neither is provided by HMRC). HMRC says there are many advantages to signing up early. It could help you to know each quarter how much tax you owe, so you can better budget to pay your tax bill when due. No longer will you be faced with the shock of a surprisingly hefty tax bill that you can’t afford to pay. Moreover, having to more regularly detail your tax expenses means you’re less likely to forget to include some, which could mean your tax bill is lower. Having to enter your costs and income more regularly could also give you greater visibility of your cash flow position and better enable you to maintain a healthier cash flow.

Wait and see?

Those with a lower taxable income can also sign up voluntarily, although many sole traders and landlords with taxable income of £30,000 a year might feel the need to sign up voluntarily at this point, especially if it involves more tax admin more frequently. Many sole traders and landlords will want to wait and see, and continue to report their taxable income via Self Assessment until nearer to a time when they’re mandated to comply with MTD for ITSA recording and reporting requirements.

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