How Making Tax Digital For Income Tax (Mtd Itsa)

HMRC has finally published detailed guidance on how Making Tax Digital for Income Tax (MTD ITSA) will work for buy-to-let landlords and sole traders with qualifying income over £10,000 which will see the end of self-assessment tax returns.

The new income tax framework for Making Tax Digital will be mandatory from 6 April 2024 and the definition of qualifying income is critical to how the system will work.

HMRC is calling on individuals, tax agents and accountants to start using the beta testing environment to feedback on their experiences and iron out any teething problems with the system. However, the trial is quite limited and is only open to landlords with UK and overseas property income, and self-employed with a sole source of income.
It is important to note that only individuals whose accounting period aligns with the tax year from 6 April to 5 April of a given year will be able to participate in the beta trial.

However, to date, only a few software providers are geared up for the extension of MTD so until HMRC authorises new providers the testing environment will be limited.

The new system will replace self-assessment tax returns for anyone who qualifies for MTD for income tax as they will have to submit all non-qualifying income through the personal tax account system instead.

The new deadline for annual updates — end-of-year statements — will be 31 January after the end of each tax year.
HMRC will use data from self-assessment tax returns to calculate qualifying income in the first instance and will contact all affected taxpayers directly to inform them that they fall under the mandatory MTD for income tax rules.
For the first time, HMRC has provided a clear definition of what will be included in ‘qualifying income’, how to report other income and how residence and domicile affect qualifying income.

It is important to note that the qualification criteria are very specific and only include revenue from buy-to-let rentals and self-employment income, for example, but not income earned from a job and paid via PAYE.

The HMRC guidance states that ‘qualifying income is the combined income that you get in a tax year from self-employment and property income sources. We assess this before you deduct expenses (gross income or turnover). All of your qualifying income must be reported through Making Tax Digital compatible software.

‘All other sources of income reported through self-assessment, such as income from employment, dividends or savings, do not count towards your qualifying income. You will need to report income from these sources using either your Making Tax Digital compatible software (if it has the functionality) or HMRC online services account’.
Foreign income remitted to the UK by anyone registered as a non-dom and paying the remittance basis, will not contribute to qualifying income.

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