Despite the latest extension to the implementation of MTD for ITSA, if you’re a business owner or landlord, there’s still plenty for you to do now to prepare and make life easier in the long run.

When will it be introduced?

MTD for ITSA was initially due to come into effect from April 2018. This proved to be too ambitious a target for HMRC and has been delayed several times. In December 2022, HMRC announced that MTD for ITSA will be postponed to April 2026. 

As well as the additional two years to prepare, mandation will also be phased in subject to the taxpayer’s income.

While there is some frustration about another delay, the general consensus is that neither HMRC or the public would have been ready to meet the planned April 2024 date. Together with the increased income thresholds, the announcement has been welcomed by the tax industry.

HMRC is continuing with the basis period reforms from the 2024/25 tax year, which requires those businesses to align their accounting period with the tax year (or 31 March). The further delay of MTD for ITSA allows those businesses to have a 24 month bedding in period with their new accounting periods, before also having to comply with MTD for ITSA.

For partnerships, HMRC announced MTD for ITSA will not apply from April 2025, as originally planned, but have not announced a new start date. Also, the status of MTD for Corporation Tax  remains unclear at this stage.

What will MTD for ITSA require?

The starting date for MTD for ITSA will be phased in subject to the taxpayer’s income:

• April 2026 for those with gross self-employment and property income in excess of £50,000; and

• April 2027 for those with gross self-employment and property income in excess of £30,000.

If you’re a business owner or landlord with gross self-employment and property income in excess of the above thresholds, you‘ll be required to keep income and expense records digitally and to submit records directly to HMRC using MTD compatible software. Rather than filing one self-assessment tax return, you’ll submit six submissions to HMRC per year, which will potentially require more time and resource than before. If you have other sources of income, such as investment income, foreign source income or capital gains, these will all be captured in the final declaration. 

Click here for more information on the submissions required if MTD for ITSA is mandated from April 2026.  

Unsurprisingly, this will come at a cost. HMRC estimates that the transitional costs alone will cost businesses in the UK £1.4 billion, with additional annual tax compliance costs of £152 million a year. Most of the additional costs will be borne from additional professional fees, as businesses look for guidance and advice on how to prepare for this significant change and complete the submissions.

The costs of preparing and complying with MTD are not the only potential costs to be aware of. HMRC is introducing a new penalty regime alongside MTD, with a points-based system that penalises those with persistent compliance issues. You should therefore ensure you’re prepared ahead of time, to mitigate the risk of starting the new compliance system with a black mark on your record. 

How to plan ahead

If you’re a sole trader already complying with MTD for VAT, you shouldn’t see much change in your record keeping when it comes to MTD for ITSA. However, other sole traders and landlords should start planning for the transition now to ensure MTD compliance and to avoid any penalties. The best way to get started is to:

1. Ensure that you are keeping your income and expense records in a digital format

When you get paid in cash you should use software to record the transaction digitally in a spreadsheet or bookkeeping software. Also, avoid piling up stacks of receipts and instead start getting into the habit of scanning in and saving those travel or office expenses, ready for each quarterly submission. We recommend that you do this before the end of the current tax year, so you are familiar with digital record keeping well ahead of the implementation of MTD for ITSA.

2. Align your accounting periods if you have multiple trades

If you have multiple trades, or a trade and a rental property with different accounting periods you should look to align these to reduce your future reporting requirements under MTD for ITSA. For example, if you have a sole trade with the year end 31 March and a rental property, which you report on a UK tax year basis (to 6 April), you should look to change the accounting periods to the same end date to avoid the additional four quarterly submissions, if your tax years are not aligned. 

3. Join the HMRC MTD for ITSA pilot

HMRC is currently running a very limited MTD for ITSA pilot and learning from the implementation of MTD for VAT to help prepare for a full roll out. The pilot is currently closed to new taxpayer’s but HMRC are planning to open this up for a wider test sometime in the next year. If you’re a UK resident sole trader with one business, or a landlord with UK property income, you will be eligible for the pilot. By joining the pilot, you’ll benefit from first-hand experience with the new “real time” tax system and ensure you are ready ahead of MTD for ITSA being mandated for all. If you’re interested in joining the pilot please get in touch below and we will add you to the waiting list. There will be no additional cost for this service for existing Buzzacott clients.