Prepare for MTD for income tax

From 6 April 2024 most unincorporated businesses will have to comply with the Making Tax Digital for Income Tax Self Assessment (MTD ITSA) regulations.

Individuals with trading and/or property income of less than £10,000 per year in total will not have to comply with MTD ITSA.

Where the business is operated as a partnership, the £10,000 turnover threshold applies to the partnership rather than the individual partners. Thus a two-person partnership with turnover of £12,000 per year will have to report under MTD ITSA, even if the partners share the income equally.

Jointly-held properties are not generally treated as partnerships. The gross income from the property must be allocated to the joint owners (and reported by those individuals under the MTD rules) if the taxpayer’s total rental and trading income exceeds £10,000.

There are two broad obligations under MTD ITSA: to keep a complete digital record of all the data necessary to make quarterly and annual reports to HMRC and to make those reports using MTD-compatible software.

The accounting records must be digitised and all parts of the accounting system must be connected via digital links. However, this digitisation is not as daunting as you may think!

Spreadsheets qualify as a digital record. If you record all your business income and expenses on a spreadsheet, you can meet your MTD ITSA obligations by using bridging software to read the relevant totals from that spreadsheet and to submit that data to HMRC.

There are a number of myths circulating about MTD ITSA:

·         It is not a requirement to have a digital link between your business bank account and your accounting system. It may be helpful to have an automatic bank feed into your accounting system, but it is not necessary.

·         Suppliers’ invoices and receipts for expenses do not have to be read into the accounting system digitally. It may save work to use software to capture that information as a digital picture instead of keying the details into the accounting software or spreadsheet, but it is not a requirement for MTD ITSA.

We can help you choose the right software, so that you meet the MTD ITSA requirements for your business.