Self-employed taxpayers and property landlords now have an extra 12 months to prepare before self-assessment tax returns become a thing of the past.

The income tax (digital requirements) regulations legislation published on 23 September 2021 confirmed Making Tax Digital for income tax self-assessment (MTD ITSA) will kick in from 6 April 2024, one year later than planned.

From this point on, income from self-employment and property worth more than £10,000 in the 2024/25 tax year will be within scope of MTD ITSA, regardless of their accounting period end dates.

General partnerships were excluded from the legislation, but the Treasury has indicated it will be mandatory for these types of unincorporated businesses to join MTD ITSA from 6 April 2025.

What is MTD ITSA?

MTD ITSA is the second iteration of the Government's flagship Making Tax Digital scheme, which will digitise the ways in which everyone pays most taxes over a decade.

VAT-registered businesses will already be familiar with MTD, with most of these firms having joined MTD for VAT from April 2019.

VAT-registered businesses with taxable turnover below the £85,000 VAT-registration threshold will join MTD for VAT from April 2022.

MTD ITSA was initially due to commence from April 2023, right up until last week when the legislation was published and the one-year delay was confirmed.

The UK's incorporated businesses are due (and we use that term very loosely) to be mandated into MTD for corporation tax from April 2026. Other than the rough date, the details on this are unavailable right now.

How will MTD ITSA work?

From 6 April 2024, unincorporated businesses with profits exceeding £10,000 must submit quarterly summaries of their business's income and expenses using MTD-compatible software.

The quarterly deadlines for most unincorporated businesses filing under MTD ITSA will be on or before 5 August, 5 November, 5 February, and 5 May. The 31 January income tax payment deadline will remain in place.

In return, unincorporated businesses will receive a tax estimated from HMRC based on the details provided in the quarterly summaries. This should provide a more real-time picture of a sole trader's tax liability.

This will eventually replace the need for a self-assessment tax return. As it stands, 2022/23 tax returns will be the last to be filed through self-assessment or before 31 January 2024.

What about basis periods?

Plans to revamp basis periods, so that all unincorporated businesses are taxed on trading profits arising on a tax-year basis, have also been put on hold for the time being.

Lucy Frazer, financial secretary at the Treasury, recently said that should basis-period reform go ahead, the changes will not kick in until the start of MTD ITSA in 2024/25, with 2023/24 being the transitional year.

An announcement on whether basis-period reform should get the green light is expected to be announced in Autumn Budget 2021, which takes place on 27 October.

In a written statement, Frazer said:

"Many respondents said that the [basis-period] reform was a sensible simplification, but asked for more time to implement the changes.

"In recognition of these concerns, these changes will not come into effect before April 2024, with a transition year not coming into effect earlier than 2023.

"The Government will respond to the consultation in due course providing the next steps."

Speak to us about MTD-compatible software.

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