Making Tax Digital for Income Tax Self-Assessment (MTD for ITSA)

Businessman checking bills

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MTD for ITSA is set to come into effect from 6 April 2024.

MTD came into effect for all VAT registered businesses trading over the VAT registration threshold of £85,000, from April 2019.

It was introduced in an effort to ‘close the tax gap’. The tax gap being the £8.5 billion annual tax deficit that the government believes exists between tax that should be paid, and tax that is actually collected on time.

HMRC believes that by requiring businesses to keep digital records and submit information more regularly this deficit will be reduced.

If you have income from a sole trade, a partnership or from property, or a combination of these, then this will impact you if your turnover is greater than £10,000 per annum.

Action you will need to take

  • Keep digital Records of all business income and expenditure
  • Sign up for a new MTD for ITSA account with HMRC before 6 April 2024
  • Update HMRC at least every three months with a summary of income and expenditure using compatible software
  • At the end of your accounting period, finalise any profit and loss position via an end of period statement (or EOPS as it will be known). This is where you will be able to make any adjustments for allowances and reliefs.
  • The final declaration effectively brings together everything done above into one final declaration which must be submitted by 31 January in the following year. It is this final declaration which will confirm to HMRC your tax liability.

Tips for successful bookkeeping with accounting software

  • Copy of all bank statements, this is even if there is a Xero feed because sometimes it doesn’t pull everything through correctly (we’ve had duplicates and missing items)
  • Paypal/Stripe/other e-payment reports if they aren’t linked to Xero.  If you have website sales that aren’t linked to Xero then all transaction reports (best in csv or Excel)
  • Copies of all purchase invoices, regardless of whether they have been paid.  Many are now sent electronically so you can email them directly or to the software package inbox.  The documents should be pdf or jpeg (Excel & Word are ok but Xero can’t read them).  Note. Any emails that don’t have attachments won’t import into the Xero inbox. 
  • Be aware re Paypal payments – the receipt from Paypal isn’t good enough.  They don’t give details of the items purchased and rarely have any VAT info.  We need the receipt/invoice from the seller – sometimes you have to ask the seller for a VAT invoice
  • Amazon invoices – similar to Paypal, the Amazon email confirmation isn’t good enough for VAT but most purchases have invoices available.
  • Any cash receipts, credit card receipts for purchases.  Copy of the credit card statement if it’s not linked to Xero.  Copies of the credit card slips aren’t good enough to claim back VAT so you need to make sure they get a VAT receipt
  • If payroll is produced outside of Xero then copies of the reports (Payslips, P32s, Gross to net)
  • Loan interest statements, or copies of any loan/HP agreements
  • If you have used business funds to purchase personal items then a note about those is useful

Advantages

  1. Digital Record Keeping – less clutter and mess in the office
  2. Avoidance of Mistakes – you are less likely to lose receipts and therefore under claim
  3. Increased Security – accounting software is more secure than spreadsheets or manual records
  4. Cloud Based Technology – you have flexibility where you work
  5. More Real Time Information – up to date information means better decision making
  6. Automation – frees up your time for the aspects of the business you prefer

Which software to use?

We use Xero and believe it is one of the best software packages on the market.  However, if you are going to be using software daily then you need to be happy with it.  I would do some research and start some trials and see which software you prefer.

For more details on MTD compliant account software, please see the link below from HMRC for all ready and compatible software as well as software in development:

https://www.gov.uk/guidance/find-software-thats-compatible-with-making-tax-digital-for-income-tax

MTD for ITSA is going to happen even though it has been delayed so start planning now so you have everything in place.  If I can be of any assistance then please get in touch.