Millions of taxpayers will need to submit quarterly plus end of period tax returns for each trade and property business they own, leading to multiple submissions for different periods under Making Tax Digital (MTD) for income tax.

MTD has now changed into MTD for income tax self-assessment (ITSA), and HMRC are now referring to the regime as ‘MTD ITSA’.

It is likely that many of these businesses are not VAT registered, so they are not already keeping digital business records. All of these businesses need to enter the MTD ITSA regime from April 2023, and for many monthly reports may be needed

What reports are required?

For each trading or property business the taxpayer operates they will have to submit a quarterly report of income and expenses in defined categories. The taxpayer will also have to submit an end of period statement (EOPS) for each of those businesses (the fifth report).

The MTD ITSA regime will incorporate all of the reporting required on the current SA tax return into a ‘finalisation’ or ‘crystallisation’ statement. This statement will bring together all of the information included in the MTD reports, plus other taxable income (such as investment and employment) to calculate the tax liability for the tax year. 

The draft MTD ITSA regulations indicate that individual landlords must submit separate quarterly updates for each category of property business (eg long term letting, FHL, overseas lettings).

All property businesses must use the tax year as the accounting basis period, but trades can use any accounting period. The quarterly reports are due exactly one month from the end of each of the quarter, which contrasts with one month and seven days after the end of the quarter for VAT.

The EPOS and the finalisation statement are both due by 31 January after the tax year end.

Start dates

The start dates for MTD ITSA will be follows:

• Existing property income: 6 April 2023
• Existing trading income: first accounting period starting on or after 6 April 2023
• New property business: 6 April following the start date
• New trade: start of accounting period in year three

For a VAT registered taxpayer with both trading and lettings businesses this will mean at least 16 tax returns each year (up from four current VAT returns) all of which will have to be checked for accuracy.

Individuals who have a combined gross income from all trades and letting businesses in excess of £10,000 per year are within scope of MTD ITSA. These people may not be liable to pay any income tax as the entry test is based on gross income not net, and the personal allowance will cover small profits up to at least £12,570.

Combinations and mismatches

If a taxpayer uses the same accounting/MTD-compatible software for all of their businesses, that smart software may combine some of their MTD reports into a single submission. For example, quarterly reports for property businesses may be submitted together and all EOPS may be delivered in one action.

HMRC intends to give businesses some flexibility to align their quarterly reporting periods, but this point is still being debated between the professional bodies and HMRC. The quarterly periods must be matched to the accounting basis periods.

It is clear that some simplification of the tax rules for accounting basis periods is required to make the implementation of MTD run smoothly for small businesses and landlords, which the ICAEW has called for this in its Budget representations.

ICAEW has also asked that the tax year end be changed to align with the end of a calendar month. Moving the year end back from 5 April to 31 March would be easiest to achieve, however the UK could follow the Irish example and change its tax year to the calendar year. The Republic of Ireland changed to a 31 December tax year end in 2002 when it joined the Euro.

Whatever the outcome of these discussions and representations, it is clear that businesses have just two years to move to digital business record keeping. For many - HMRC estimates there are four million businesses that pay income tax, but who are not VAT registered – this will be a significant change.

Most of these businesses provide their books to their accountant once a year to prepare their annual accounts and SA tax return. They will now have to keep those records digitally and make sure they are up to date every three months. This will almost certainly require the assistance of a bookkeeper or accountant. Check out the local Xero Certified bookkeepers in your area now, and start your planning sooner rather than later. Click the button below if you need help.

Noel Guilford