Sage Advice UK – MTD for ITSA: What businesses and accountants need to know

The digital­i­sation of taxation is a major focus of the UK Government.

“Making Tax Digital” (MTD) for VAT is already underway and demon­strates the advan­tages of working digitally for many companies.

The next milestone will be the intro­duction of MTD for Income Tax Self-Assessment (ITSA) for the self-employed and landlords.

MTD for ITSA was origi­nally due to be intro­duced from 6 April 2024 for sole traders and landlords with a quali­fying annual income of over £10,000.

Recog­nizing that this requires a signif­icant change to the way it works in a difficult economic environment, HMRC has decided to change the threshold for the oblig­ation and move to a phased-in from 2026.

In this article, we’ll cover all the updates you need to know and who can take part in early testing next year.

Here’s what we’ll cover

What is MTD for ITSA?

Where are we currently with MTD for ITSA?

What else has changed with MTD for ITSA?

What is the private beta and how does it work?

What happens after the private beta?

What accoun­tants need to do now

What companies need to do now

Final thoughts on MTD for ITSA

What is MTD for ITSA?

Digitizing income tax is a new way of reporting income and expenses that will replace self-assessment returns for sole traders and landlords.

The taxpayer or his repre­sen­tative must do the following:

• Use software compatible with Making Tax Digital for ITSA
• Maintain digital records of business trans­ac­tions
• Send quarterly updates to HMRC summa­rizing these business trans­ac­tions. Separate quarterly updates are required for UK property, overseas property and each of your self-employed activ­ities.
• Provide details of any tax and accounting adjust­ments and reliefs to determine your taxable property and self-employment income.
• Provide details of other sources of income and other infor­mation such as tax reliefs and allowances that you would like to take advantage of and which were previ­ously included in your self-assessment tax return.
• Confirm that the infor­mation you have provided is “complete” by submitting a “final decla­ration” by January 31 of the following year

Where are we currently with MTD for ITSA?

This was announced in writing Minis­terial statement on December 19, 2022 that the launch of MTD ITSA would be postponed and the income threshold would be increased.

At the same time, the government announced a review of the needs of smaller businesses to consider whether it makes sense to include those below the £30,000 income limit in MTD.

HMRC is now taking a phased approach:

• Self-employed businesses and landlords earning more than £50,000 will need to comply with MTD for ITSA from April 2026
• Those earning more than £30,000 will have to comply from April 2027.

The inclusion of general partner­ships has been postponed with a commitment to introduce MTD at a later date.

The aim is to give businesses, partic­u­larly those on the lowest incomes, more time to adapt to the new ways of working, while also giving HMRC more time to thoroughly test the process for all users.

Victoria Atkins, Treasury Secretary to the Treasury, commented:

“It is right to take the time to work together to maximize the benefits of Making Tax Digital for small businesses by imple­menting the change gradually. It is important to ensure this works for everyone: taxpayers, tax agents, software devel­opers and also HMRC.”

What else has changed with MTD for ITSA?

At the autumn decla­ration on November 22, 2023, the Result of the Making Tax Digital Small Business Review. The confirmed MTD for ITSA will not be extended to sole traders and landlords earning less than £30,000 for now, but the Government will continue to review this decision.

The changes to the scope of the MTD for income tax, notably the increase in the threshold from £10,000 of eligible annual income to £30,000, mean that the taxpayer group affected has been reduced by more than half and now stands at 1.75 million.

Here are the other changes announced in the update:

• The period covered by each quarterly update within a tax year moves from individual to cumulative. This means that in the event of an error or change, taxpayers are not required to re-file a historical update and instead the most recent quarterly update overwrites the previous one. This should greatly simplify the quarterly update process, especially if historical errors are discovered.
• Period-end state­ments for each source of income are no longer required. Those of you who have been following MTD policy devel­op­ments will remember that an additional filing was origi­nally made between the quarterly updates and the final­ization of the return to confirm the completeness of self-employment and rental income. In reality, this entry was somewhat unnec­essary as you could continue to adjust the income until the tax return was completed. It created unnec­essary complexity and ambiguity for taxpayers and was therefore removed by HMRC to simplify the process.
• There are reliefs for landlords of shared property. You may choose to maintain less detailed digital records and opt out of submitting expenses within quarterly updates. The question of how common property landlords would comply with the MTD’s record­keeping and filing require­ments has plagued the program since its inception. Therefore, HMRC simplified the draft again by intro­ducing the easement, effec­tively taking the issue off the table.
• HMRC will develop a solution that allows multiple repre­sen­ta­tives to partic­ipate in the process for a single taxpayer. The so-called “multiple agents” puzzle was another central theme in MTD design. Essen­tially, the move to quarterly reporting AND year-end reporting for multiple income streams could result in taxpayers wanting to use more than one autho­rized repre­sen­tative — something that HMRC’s backend systems cannot currently support, but they have committed to doing so ahead of Commis­sioning a solution to be imple­mented that will support this.
• Specific excep­tions are intro­duced for foster parents and people without a social security number.
• The tax system for furnished holiday rentals will be abolished from April 6, 2025. This will help simplify reporting again.

Taken together, these changes address many of the unknowns and concerns surrounding the design and policy of the Income Tax MTD that led to the delay.

HMRC now believe they are in a much better position to move the program into the trial phase.

What is the private beta and how does it work?

HMRC had already paused pilot testing of the program before announcing the delay in December 2022, but restarted MTD’s private beta testing for ITSA on 22 April 2024 and is currently encour­aging agents to sign up, although it is also possible for taxpayers to sign up direct.

The tests have been restarted as a “private beta” for the 2024/25 tax year, meaning the tests will be carried out on a smaller scale.

Making Tax Digital program director Craig Ogilvie told attendees at the Festival of Accounting and Bookkeeping in March that HMRC is focusing on “quality over quantity” for the 2024/25 tax year.

It is also worth noting that whilst HMRC has addressed many of the key issues surrounding the policy and design of the scheme, the function­ality will be imple­mented in a phased manner.

This means that while all the necessary features to support all taxpayers will be in place in April 2026, not all of them will be in place on the first day of beta testing.

Therefore, not all taxpayers are eligible to enroll in the 2024/25 private beta test.

To qualify for the private beta, you (or your customer must):

• Set a tax year that runs from April 6th to 5th (or April 1st to March 31st if your software supports it).
• Make sure personal details are up to date with HMRC
• Be a UK resident
• Have a social security number
• You have submitted at least one self-assessment tax return
• Stay up to date on tax documents and payments

You cannot volun­tarily register if you:

• Do you have a High Income Child Support Charge (HICBC)
• Have a payment plan with HMRC
• Are partners in a partnership
• Apply for spousal support
• Apply for the blind allowance
• Are bankrupt or insolvent
• Are you a Lloyds insurer, a religious minister or an MP?
• Receive an income as a caregiver or partic­ipate in a shared apartment
• Receive income from a trust
• Receive income from a joint property
• Receive income from a furnished vacation rental
• are the subject of a compliance inquiry
• Use “average” rules because your profits will vary from year to year (e.g. if you are an artist, farmer, or writer).

For anyone consid­ering voluntary partic­i­pation in the 2024/25 private beta test, there are a few important things to consider:

• During the trial period, you cannot claim a loss carry­forward, change the billing period, or change the billing method.
• You can join during the tax year, but you must submit quarterly updates retroac­tively from the beginning of the year. So if you’re not ready to join now, you can join later in the year.
• If you change your mind and no longer wish to partic­ipate in the beta test, you can leave the beta test and return to the usual self-evalu­ation process (although you must join MTD from April 2026 if you are required to do so).
• HMRC has confirmed that taxpayers taking part in the beta will be subject to the new MTD penalty regime for income tax, which is a “points” based system similar to the MTD regime for VAT and penalties for both late filing and late payment.
• However, HMRC has confirmed that you will not face any filing penalties for late filing of quarterly updates during the trial period. However, this exception does not apply to the online closing decla­ration due on January 31st. This means that you can still collect points under the new penalty system if you submit your online final decla­ration late.
• While partic­i­pating in the beta, late payment penalties will continue to apply, calcu­lated using the new MTD method. Under this method, late payment interest is calcu­lated as a percentage of the outstanding taxes and is applied if your payment is more than 15 days overdue (whereas the current regime starts after 30 days). Depending on the amount of debt you owe, this can result in signif­i­cantly higher penalties.
• You will benefit from additional support from HMRC, which said in a letter to repre­sen­ta­tives: “By taking part in the trial program you will have access to the dedicated MTD customer support team to help you success­fully transition to MTD for income tax and resolve any issues solves.” . For those taking the tests in 2024–2025, the team can also assist the individual or their repre­sen­tative with some of the individual’s broader personal tax matters (individual PAYE and self-assessment matters) for the 2024–2025 financial year.”

The other key element for a successful beta is the avail­ability of 3^approx Party software without which partic­i­pants cannot submit entries.

HMRC hopes that software providers will get on board early and support the program to ensure successful end-to-end testing and ensure taxpayers and their repre­sen­ta­tives have choice in the market.

The providers and their products that are currently partic­i­pating and have gone through the recog­nition process are listed on HMRC’s software selection pages.

What happens after the private beta?

If the current criteria exclude you or your customers from partic­i­pating in the private beta, check back next year as many restric­tions will be lifted starting April 2025 to further expand testing.

Testing will expand to a large-scale public pilot testing program in April 2025. This is ahead of compulsory partic­i­pation from April 2026 for sole traders and landlords with incomes over £50,000.

HMRC hopes to encourage voluntary early adoption of MTD. They will continue to work with users and address challenges during public pilot testing.

What accountants need to do now

First, you must discuss these changes with each customer affected by MTD for ITSA.

If you think a customer would be a good candidate for the 2024/25 private beta test, be sure to walk them through the process and explain the impli­ca­tions of partic­i­pating in the voluntary program.

Once you’ve discussed it with them, make sure to get their consent. You will need this consent before you can continue with the regis­tration process below.

All agents need one Agent Services Account (ASA) to access MTD Services and make submis­sions on behalf of their customers. Think of this as similar to logging into the Government Gateway.

You only need one ASA for your business. Once you have one, you can set up admin or assistant logins for your employees to use the account.

Your business may have already signed up for an ASA when you regis­tered to file MTD for VAT returns or Trust Regis­tration Service returns.

The next step is to ensure you have compatible accounting software to submit quarterly updates on behalf of your clients.

Sage Accounting is currently one of the few products on HMRC’s approved provider list that is ready to use out of the box if you want to sign up clients for beta testing.

Once you have MTD compatible software you can do this Enroll eligible customers for MTD for ITSA. Here is the infor­mation you need for the regis­tration process:

• Customer’s full name
• birth date
• Social Security Number
• The date the company was founded or the date your client started earning revenue
• Accounting method (cash or accrual)
• The tax year in which your client wants to use MTD for ITSA

Upon completion, you must provide the customer’s approval.

You can do this either by logging into the Agent Services account and following the steps, or you can copy the customer’s existing self-assessment autho­rization from your HMRC online agent services account into the ASA.

What companies need to do now

The service is currently voluntary.

HMRC is focusing on the use of private beta testing with agents.

If you are a sole proprietor or landlord, you can do this too register directly for the service if you meet the eligi­bility criteria above.

Otherwise, continue to send annual self-assessment returns as usual until MTD for ITSA becomes mandatory for you based on your quali­fying income.

If you have an accountant acting as your repre­sen­tative, they can register with MTD for ITSA on your behalf.

HMRC will write to you confirming that you must start using MTD for ITSA from 6 April 2026 if you meet all of the following criteria:

• You are an individual
• You are regis­tered for the self-assessment
• You were a sole proprietor or landlord before April 6, 2025
• You have chargeable income of more than £50,000 in the 2024/25 tax year.

If you’re respon­sible for your own bookkeeping, you’ll also need to make sure you switch to software that works with Making Tax Digital.

To find out your software options, check out HMRC’s list MTD compatible software.

If you would like to volunteer, you should speak to your software provider before signing up for the private beta. As a number of products are currently in devel­opment, they are not yet available for MTD services.

HMRC have said they will continue to update this page as new software becomes available.

Final thoughts on MTD for ITSA

The Government will continue to work with all stake­holders to get the MTD design right for ITSA.

HMRC believes that a thorough testing program will address any issues and provide HMRC with clarity on the final design.

Whether you are an agent or a taxpayer, you can contribute to the ongoing testing by volun­teering and help ensure that the final services meet the needs of all users when launched.

If you’re not yet eligible to sign up to the services, you can still prepare for the upcoming MTD changes by switching to HMRC-approved accounting software such as Sage Accounting, which works with Making Tax Digital.