Making Tax Digital for Income Tax Self Assessment (MTD ITSA) is going to transform the way landlords and business owners report what they earn to HMRC.
Despite the confusing acronyms, it’s vital that business owners and landlords familiarise themselves with Making Tax Digital and what it means for them, so they can be fully compliant when the time comes.
In this article we’ll cover the following to get you up to speed on how MTD affects self-employed landlords:
- What is Making Tax Digital?
- What is Making Tax Digital for Income Tax Self Assessment (MTD for ITSA)?
- How does MTD ITSA affect landlords?
- What does a landlord need to do to prepare for Making Tax Digital?
We’ll also look at the benefits of cloud-based bookkeeping and accounting software, and the critical role it plays in the upcoming MTD changes.
What is Making Tax Digital?
Making Tax Digital – or MTD for short – is a government initiative which sets out to revolutionise the way we manage tax in this country. The government hopes that the move to MTD will provide us with “one of the most digitally advanced tax administrations in the world” by transforming tax administration and making it easier for taxpayers to get their taxes right.
The initiative is rolling out in stages with the first, MTD for VAT, already in place. This means that all VAT-registered businesses must now keep digital bookkeeping records, and use MTD software to submit their VAT returns.
What is Making Tax Digital for Income Tax Self Assessment (MTD for ITSA)?
Making Tax Digital for Income Tax Self Assessment (MTD for ITSA) is the next phase of the MTD initiative. This stage will completely transform the existing process of submitting annual Self Assessment returns, replacing the system as we currently know it.
When does MTD ITSA come into effect?
The MTD Income Tax Self Assessment timeline:
- The rules come into effect 6th April 2024 for all sole traders and landlords whose total income from self-employment or property is more than £10,000 in a tax year.
- Then from 6th April 2025, the rules will include partnerships with individual partners too.
The following stage of MTD will deal with Corporation Tax, but this isn’t due until at least 2026.
How does MTD ITSA affect landlords?
The MTD rules for ITSA will become compulsory for all sole traders and landlords whose total income from self-employment or property is over £10,000 from 6th April 2024. This means that if you earn an income from renting out property, MTD should be on your radar!
It’s also worth noting that the £10,000 threshold is accumulative. So, if you earn money from self-employment and property, the threshold applies to the total gross income from those activities combined.
What MTD ITSA means for financial reporting as a landlord
The most significant change that business owners and landlords will see under MTD is the regularity of financial reporting.
Instead of filing a Self Assessment tax return with HMRC on an annual basis, those affected will submit four updates on a quarterly basis. These updates will cover information around income and expenses.
At the close of every tax year, business owners and landlords will also need to submit an end of period statement (EOPS), along with a final declaration.
Start keeping digital records
Many landlords may already be familiar with the idea of keeping digital financial records. Under the new MTD rules, keeping business income and expense records digitally becomes compulsory for all landlords and self-employed people whose income is more than the £10,000 threshold.
There’s no need to wait around until the MTD for ITSA changes come into effect in 2024. In fact, finance professionals strongly recommend getting to grips with digital financial recording as soon as possible.
Start sending quarterly updates
Up until now, landlords and self-employed people have been sending updates of earnings to HMRC once a year via an annual Self Assessment tax return. However, once MTD ITSA changes are in place, landlords and business owners will need to start submitting business income and expenses updates on a quarterly basis (every three months).
The deadlines for submitting these quarterly updates are as follows:
- 5th August
- 5th November
- 5th February
- 5th May
These updates will need to be completed using an MTD-compatible software (such as Pandle!).
Start submitting an end of period statement (EOPS)
As each financial year comes to a close, you will need to complete an end of period statement (EOPS). This needs to be done for every source of income you receive earnings from. So, if you own multiple properties or sole trader businesses, you will need to submit an EOPS for each one.
You will also need to submit a final declaration along with your EOPS in place of your usual Self Assessment return. This is how you will pay any National Insurance or tax that is due.
Do I still need to make payments on account with MTD ITSA?
Even though the process of reporting your income and expenses is changing with MTD Income Tax Self Assessment, the payment on account system will still apply.
Payments on account are made by self-employed people whose tax bill for the previous year was £1,000 or more. The payments are made in two instalments:
- The first instalment is due by 31st July following the end of the tax year that it relates to. HMRC assume you’ll earn a similar amount to the year before, so this instalment is equivalent to half of the previous year’s tax bill.
- The second instalment is a ‘balancing payment’ for the remaining amount, which is due by 31st January.
What does a landlord need to do to prepare for Making Tax Digital?
First of all, it’s important to be aware that you won’t be automatically registered for MTD ITSA, even if you already use MTD for VAT, or are already registered for Self Assessment. You’ll need to make sure that you register for MTD ITSA in plenty of time!
You can volunteer to register for MTD ITSA early, but once you sign up, you must follow the rules.
The importance of cloud-based bookkeeping and accounting
As you might expect, the new rules for mandatory digital financial records have a big impact on the way that landlords record their bookkeeping. The good news is that there are lots of other benefits to using digital record keeping, and that these days cloud-based bookkeeping software can be very accessible.
Guaranteed HMRC compliance
Not only do your financial records need to be kept digitally, but you must also use HMRC-approved software to make your submissions. Using one system which can both store your records and submit your information to HMRC will really streamline the process (and therefore get rid of the deadline dread).
Less risk of mistakes
Good bookkeeping software providers have all sorts of algorithms and tools built in which are designed to spot anything which looks like a mistake. Digital record keeping also means there’s less chance of losing data.
Automated tools, such as bank feeds which connect your bookkeeping to your bank account, mean you don’t have to sit there grinding through manual data entry (and running the risk of typos).
On that note, look out for digital bookkeeping software that allows you to safely automate as many processes as possible. While automation won’t have a direct impact on the MTD changeover, it will help to take all of the hassle out of the transition period.
Automating things like payment reminders and invoicing will allow you the time and headspace to familiarise yourself with the new changes, whilst maintaining business as usual. It might even help your clients pay a little faster!
Learn more about Pandle’s timesaving bookkeeping features, and get ready for the MTD transition with your free account.