Delay of Making Tax Digital for Income Tax Self-Assessment

The start date for Making Tax Digital for Income Tax Self-Assessment (MTD for ITSA) has been delayed for one year and will now be introduced in the tax year beginning in April 2024.

This date has been set in legislation, providing certainty around the timeframe for MTD for ITSA.

Trusts, estates, trustees of registered pension schemes and non-resident companies will not be required to join MTD for ITSA.

General partnerships, not including LLPs, mixed or corporate partnerships, will not commence MTD for ITSA until April 2025 – although this date has still not been set in legislation. There is currently no indication of when other more complex partnerships will have to join the MTD scheme.

It is still not certain if MTD for Corporation Tax will start as planned in 2026.

Turnover for MTD for ITSA

Self-employed businesses and landlords with annual business or property income above £10,000 will need to follow the rules for MTD for ITSA from their next accounting period starting on or after 6 April 2024, regardless of their accounting date.

The £10,000 threshold remains, despite petitioning for a higher entry threshold.

The threshold must consider

  • The taxpayer’s income from all their sole trader businesses; plus
  • Any rental income.

Businesses will be allowed to exit MTD for ITSA if they fall below the threshold for three successive years.

Filing and penalties

It is only when the tax return totals reach the £10,000 threshold that HMRC will issue a notice to file under the MTD regulations.

Penalties will now be introduced for those who are mandated for MTD for ITSA in the tax year beginning in April 2024, and for all other ITSA customers in the tax year beginning April 2025.

Why the delay?

If MTD for ITSA had been mandated from 6 April 2023, the turnover test would need to apply to the figures reported in the 2021-22 tax return and potentially turnover reported in the 2021-22 return.

Reduced turnover and rental income would have impacted many taxpayers in this period because of the pandemic. Local authority grants for businesses liable for business rates would also increase business turnover.

The base year for testing the MTD ITSA turnover threshold will now be the tax year 2022-23. Turnover figures for this year should not be altered by Covid-19 funding and should, hopefully, reflect more normal trading figures.

Changes to the basis period rules delayed

The Autumn Budget 2021 confirmed that changes to the way in which unincorporated businesses are taxed will still go ahead, but will now come into effect a year later than planned in the tax year 2024-25. 

The Government’s proposed reform to the basis period rules involves simplifying the way trading profits of businesses are allocated to tax years under Income Tax Self-Assessment.

What is the impact of this reform?

Sole traders and partnerships will be subject to income tax on profits arising in a given tax year. This means a business’s profit or loss for a tax year is the profit or loss arising in the tax year itself, regardless of its accounting date.

For businesses with an accounting year end between 31 March and 5 April, this will mean no change. For other businesses, this is likely to bring forward the date on which taxable income will need to be calculated and tax will need to be paid.

On transition to the tax year basis, in the tax year 2023-24, all businesses’ basis periods will be aligned to the tax year and all outstanding overlap relief given.

We will continue to update you on any new legislation around MTD for ITSA and basis period reform as it is published. Should you have any queries, please get in touch with your usual M+A Partners contact or email