HMRC has finally published detailed guidance on how Making Tax Digital for Income Tax (MTD) will work for individuals with qualifying income over £10,000 which will see the end of self-assessment tax returns. The new income tax framework for Making Tax Digital will be mandatory from 6 April 2024 and the definition of qualifying income is critical to how the system will work.

In recent years, there has been a push from HMRC to digitalise tax to create efficiencies, therefore income tax is the next area to take this step. Once the 2023 tax return has been submitted (on or before 31 January 2024) HMRC anticipate writing to all qualifying individuals notifying them that they will need to change their reporting.

Timelines

Following on from the basis period reform which must be completed by 5 April 2024, MTD will be enforced from 6 April 2024 therefore the 2024/25 tax year. Partnerships however will be given a years grace and not required to be registered until 6 April 2025.

Early sign up is available similar to that of MTD for VAT, but it is likely HMRC will issue more and more guidance as we approach the switch over date.

Qualifying income

Qualifying income that needs to be reported for MTD has been limited to buy-to-let income and self-employment where both exceeds £10,000. If your turnover (not profit) exceeds £10,000.

It is important to note that income earned from employment and dividends for example are not qualifying income sources.

Software

Providers have started to build a package to align with the new requirements, similar to before more and more providers will be onboarded as we approach 2024, but for now the list of providers can be found on the GOV.UK website. 

Records

You must use compatible software to keep digital records of all your business income and expenses.

Using the software, you should create records of your transactions:

• As close to the date of the transaction as possible
• Before you send the quarterly update for that period
• No later than the quarterly deadline

Submissions

Every 3 months, your compatible software will add together your digital records to create totals for each income and expense category. These summaries are known as quarterly updates.

You do not need to make any accounting or tax adjustments before sending an update, but you can if you would like your estimated tax bill to be more accurate.

After your compatible software is authorised, you need to send updates for each income source every 3 months. Your software will tell you when and how to send the updates. You can send updates more frequently, for example, if you want to understand how a significant business receipt or expense affects your estimated tax bill. Most compatible software should allow you to send an update on any day.

If you do not expect to have any additional transactions to record, you can send an update up to 10 days before the end of a quarterly period. For example, if you’re going on holiday and know that you will not be working for the remainder of the quarterly period.

You must send a quarterly update within one month of the end of the standard quarterly period. If you do not send it by this deadline, you may need to pay a penalty. The periods will align with the tax reporting system i.e. 05/07, 05/10, 05/01 and 05/04, however at a later date there will be an option to report using calendar quarters.

You should update your records as soon as possible if you notice that you:

• Made a mistake when creating a previous digital record, such as accidentally duplicating a transaction
• Forgot to record an expense or a sales receipt

This will either be when you send your next quarterly update or when you confirm an end of period statement.

End of period statement

At the end of a tax year, the information you have sent in your quarterly updates will be combined to show your income and expenses for the tax year. You must have sent HMRC quarterly updates for each quarterly period before you can confirm an end of period statement. (If you have multiple businesses you need to confirm an end of period statement for each business).

The end of period statement will reflect the normal accounts and tax process whereby us as accountants will take all of your records, compile the records, complete the accounts, make the usual accounting adjustments and complete the end of period statement which will now replace the self-assessment tax return.

When you confirm an end of period statement, you will be declaring that:

• The information you have provided for that business is correct and complete
• You have finalised your tax position for that business, for the tax year

After submitting an end of period statement, you will be able to see an updated estimate of your tax bill. The deadline for confirming an end of period statement is 31 January after the end of the tax year (identical to the current tax returns). If you do not confirm by the deadline, you may have to pay a late submission penalty.

Other income

After finalising your business income, you may need to send HMRC information on personal income sources, such as savings or dividend income. These income sources do not contribute to your qualifying income and do not fall under the Making Tax Digital for Income Tax requirements. This means you do not need to report them quarterly, but you can choose to do so.

You can make your final declaration through your Making Tax Digital for Income Tax compatible software if either:

• You’re able to submit data on all of your personal income sources through your software
• You do not have any personal income sources to declare

If your software does not support the submission of your personal income sources, it will be possible to use your HMRC online services account to submit this data instead.

Once you have told HMRC about all of your taxable income for the year, you can make your final declaration. When you make your final declaration, you will be declaring that:

• The information you have provided is correct and complete
• You have finalised your Income Tax position for the tax year

You must make your final declaration by 31 January following the end of the relevant tax year. If you miss the deadline for your final declaration, you may need to pay a penalty.

The information provided will then be used to generate your final self-assessment tax bill for that tax year.

We will provide more updates as they become available and hope to issue more guidance in due course.