MTD ITSA is as Making Tax Digital for Income Tax Self Assessment and is HMRC's plan for unincorporated businesses and landlords from April 2024. It was originally planned to take effect from April 2023 but has now been postponed for a further 12 months.
Whilst this seems a long way ahead now is the time to start thinking how you will manage this. Don't bury your head in the sand!
MTD ITSA will apply to individuals who have income of more than £10,000 per year, including from property, and who complete a Self Assessment Tax Return will have to submit their accounts digitally to HMRC on a quarterly basis.
If your financial year starts in April 2024 your first quarterly submission will be in July 2024 and you will have to keep digital records of your income and expenses for the whole of this first quarter and continue doing so for every subsequent quarter.
What does digitally mean?
Digitally means recording your income and expenses in software which is compatible with HMRC so that you can upload the information directly from the software to HMRC each quarter. Software would include accounts software such as Xero or one of the many other options.
It is not difficult to maintain digital records as you will already be doing this if you are using accounts software and, if you are over the VAT registration threshold, you will already be submitting your VAT returns digitally.
Transferring to accounts software
If you do not currently use accounts software you need to plan how you will transfer from your current method to a digital method. The transfer will need to be done at the start of a financial year otherwise you will have some accounts information recorded manually and some digitally which will make producing your year end accounts more difficult. And ideally you would want to be using the software for a full financial year before you are required to make submissions so that you can iron out any hiccups (i.e. learn to use it properly or find a bookkeeper who can do it for you).
Once you use accounts software an electronic copy of the paperwork relating to each transaction can be linked to it so that you immediately have the information to hand and don't have to search paperwork or external electronic files for it.
How will the information be used?
HMRC will use the quarterly returns you submit to check whether your income and expenses information is being recorded accurately so they can let you know if there are any errors. You will also be able to get an estimate of how much tax will be payable. It is therefore important that your accounts are kept up to date so that you are reporting all your income and all your expenses at the end of each quarter.
At the end of your financial year you or your accountant will prepare a final Declaration which will adjust the figures previously submitted and add in any additional information to give a final total on which the tax is calculated. This will replace your Self Assessment Tax Return.
How should you prepare for this?
Don't think it won't ever happen. HMRC is aiming to be one of the most digitally advanced tax administrations in the world (their words!)
Decide if you want to use accounts software yourself or whether you need help from a bookkeeper.
Choose the accounts software you want to use and learn to use it by setting it up at least one financial year before you are required to submit returns.
Don't be fooled by software which says it can automatically submit the information for you. The information being submitted will only be what you have recorded and will be as good or as bad as the information you have put in.
Don't leave it to the last minute!
Do it yourself?
Of course you can do it yourself. Accounts software is easy to use - as long as your accounts are simple and straightforward - and a press of a button will submit them straight to HMRC. But accuracy and consistency is the key and you will need to understand all the rules about what are allowable and non-allowable expenses and whether you can claim VAT or not because the whole point of MTD ITSA is so that HMRC can see where you are going wrong and put you right. HMRC have a lot of information available on their website so lack of knowledge for your errors may not be accepted by HMRC when you want to appeal the penalty they have given you.
You will find people who can train you to do it yourself but you will always come across something you don't know how to deal with and you may even get your accounts into a complete muddle. Bookkeepers and accountants do this work every day which is why it makes sense to choose an expert to do it for you from the start and not just at the last minute when you find you don't have the time and have missed the deadline.
How can we help?
We use Xero accounts software and can get you set up quickly and easily. We can set it up for you, give you some basic training so you become familiar with it and then we can do some or all of your bookkeeping for you. Some of our clients manage the sales themselves, others leave it all to us.
The advantage of using us to do your monthly or quarterly bookkeeping instead of trying to do it all yourself means that your submissions will be on time and accurate with all information for the quarter recorded. This will give you a more accurate estimated tax figure each quarter. And by using software you will have the added bonus of up to date financial information which you can use to make timely business decisions.
Give us a call to get yourself prepared for the inevitable digital quarterly tax submissions. We have the experience, knowledge and ability to get it done.
