MTD for INCOME TAX SELF ASSESSMENT TAX RETURN

MTD for INCOME TAX SELF ASSESSMENT TAX RETURN

The basic requirements of MTD for ITSA self assessment tax returns are those unincorporated businesses and landlords with turnover over £10,000 a year will be required to:

• keep income and expense records digitally;
• use MTD-compatible software to submit digital quarterly updates and end of period statements; and
• submit a final declaration for each tax year.

The system for paying income tax is unchanged.

1. Applying the rules

1.1. Who has to use MTD for ITSA?

The MTD for ITSA provisions applies to:

• A person within the charge to income tax, who, not in partnership, carries on (or has carried on) a trade, profession or vocation, a property business or any other activity which may give rise to a charge to income tax as either trading income or property income; but excluding:
  • the trustees of a charitable trust, or the trustees of an exempt unauthorized unit trust – unless the trustees elect for the MTD for ITSA provisions to apply to them; and
  • in respect Lloyds underwriting, distributions to shareholders in a real estate investment trust (REIT) and participating in an open-ended investment company which may make property income distributions (together known as excluded activities) – unless the person elects for the MTD for ITSA provisions to apply in respect of these ‘excluded activities’; and
• A partnership if one or more of the partners is within the charge to income tax but excluding if all the activities of the partnership which may give rise to profits or income are excluded activities (see above) unless the person elects for the MTD for ITSA provisions to apply. Regulations will be required to provide further detail about how MTD for ITSA will apply to partnerships.

1.2. When do the MTD for ITSA rules start?

The MTD for ITSA provisions apply:

• for persons, excluding partnerships, from 6 April 2024;
• for general partnerships, from 6 April 2025 (although this has not yet been legislated and will require separate regulations); and
• for other partnerships from a date yet to be set.

2. Possible exemptions

As well as the exclusions referred to above, a person will be exempt from using MTD for ITSA if they:

• are digitally excluded
• meet the conditions for one of the income exemptions to apply
• are a company chargeable to tax under the non-resident company exemption)
• are acting as a trustee (including an executor or administrator and a trustee of a registered pension scheme) or
• are a person who for the tax year is not domiciled in the UK in respect of their

‘Foreign businesses’, being that person’s overseas property business and any trade, profession or vocation carried on by that person outside the UK

2.1. Digital exclusion exemption

A person will be exempt from using MTD for ITSA for a tax year if:

• The person meets the digital exclusion condition by:
  • Having a religious objection to the use of electronic communication; or
  • It not being ‘reasonably practicable’ for the person to use electronic communications or to keep electronic records due to age, disability, location or any other reason;

• The person gives notice to HMRC that they are digitally excluded, including:
  • specifying how the digital exclusion condition is met in relation to the person; and
  • specifying the date from which the digital exclusion condition is met and, if the person has since ceased to be digitally excluded, the date on which the condition ceased to be met; and
• HMRC confirm they are satisfied that the person is digitally excluded.

HMRC’s guidance on applying for an exemption from MTD for ITSA says that if they have already confirmed that a person is exempt for MTD for VAT, then the person will not need to apply for an exemption for MTD for ITSA.

2.2. Income exemption

Income exemption for a person not required to use MTD for ITSA in respect of the previous tax year

A person will be exempt from using MTD for ITSA for a tax year if:

• they were not required to use MTD for ITSA in respect of the previous tax year; and
• the amount of the person’s qualifying income for the most recent tax year in relation to which the filing deadline fell before the start of the tax year in question is not more than £10,000.

A person’s qualifying income for a tax year is the total income, before any deductions, which, for each business carried on by the person in that tax year, are included in that person’s tax return for that tax year.

A person’s qualifying income is adjusted proportionately on a time basis for periods of more or less than 12 months, or, if that method would work unreasonably or unjustly, on a just and reasonable basis.

(Income exemption for a person required to use MTD for ITSA for three tax years.)

A person will be exempt from using MTD for ITSA for a tax year if:

• the person was required to use MTD for ITSA in respect of each of the three previous tax years; and
• the person’s qualifying income for each of those three tax years was not more than £10,000.

A person’s qualifying income for a tax year is:

• the total income, before any deductions, which, for each business carried on by the person in that tax year, are included in that person’s tax return for that tax year; or
• where the tax year has ended but the filing deadline for the tax year has not passed, so much of the amounts of income, before any deductions, as are included in the quarterly updates for that tax year for each business carried on by the person.

A person’s qualifying income is adjusted proportionately on a time basis for periods of more or less than 12 months, or, if that method would work unreasonably or unjustly, on a just and reasonable basis.

2.3. Election not to be exempt

A person can elect not to be exempt by virtue of either of the above income exemptions.

3. Detailed requirements

3.1.  Record keeping

In addition to existing record-keeping requirements, a person required to use MTD for ITSA must keep digital records.

The digital records must be recorded by the earlier of:

• the quarterly deadline for the quarterly period in which the digital record falls; or
• immediately before the person provides the quarterly update for the quarterly period in which the digital record falls.

The records to be kept are the records of each of the transactions made in the course of the business, including:

• the amounts of the transactions;
• the dates of the transactions for income tax purposes; and
• the categories of transactions into which the transactions fall, to the extent those categories may be specified in an update notice which exists at the date of the transaction.

A person who carries on a business as a retailer can elect instead to retain the digital records specified in a ‘retail sales notice’ in respect of their retail sales, where such a notice has been made by HMRC.

Where a person fails to keep the required digital records, the person can be charged a penalty of up to £3,000.

Where a person discovers an error or omission in their digital records, they must correct the records as soon as possible.

3.2.  Quarterly updates

A person must provide HMRC with separate quarterly updates for each trade or property business carried on, as specified in an update notice.

The basic requirement is that a person must provide updates as follows:

If a person makes a ‘calendar quarters election’ updates are required as follows:

Although for the first tax year for which a calendar quarters election has effect the first quarterly update period runs from 6 April (not 1 April) to 30 June.

An update notice is a notice made by HMRC which specifies update information to be provided which includes (but is not limited to):

• providing designatory information, enabling HMRC to identify a relevant person, the type of business carried on by a relevant person, the commencement and cessation dates of the business or the basis used for calculating taxable profits for the purposes of income tax;
• providing totals of the amounts falling within specified categories of transactions, being amounts derived from the relevant person’s digital records; and
• identifying the properties which form part of a property business. There is no requirement to make tax or accounting adjustments in quarterly updates.

3.3.  End of period statements

A person must provide a separate end of period statement (EOPS) for each trade or property business for each relevant period (basis period or tax year). This must include:

• end of period information as specified by HMRC in an end of period notice; and
• a declaration that the information in the statement is correct and complete to the best of that person’s knowledge.

The end of period information which may be specified by HMRC includes (but is not limited to):

• providing designatory information, enabling HMRC to identify a relevant person, the type of business carried on by a relevant person, the commencement and cessation dates of the business or the basis used for calculating taxable profits for the purposes of income tax;

• identifying the relevant period to which the information relates;

• providing totals of the amounts falling within specified categories of transactions for the relevant period;

• identifying the properties which form part of a property business; and

• providing information concerning any

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