MTD ITSA - FAQ

What Is MTD ITSA?

MTD ITSA is part of the UK's Making Tax Digital (MTD) initiative introduced by HM Revenue and Customs (HMRC). The goal of MTD is to modernize the tax system by moving away from paper-based returns and ensuring that all eligible taxpayers maintain and submit their income records digitally.

Instead of filing one large annual Self Assessment tax return, MTD ITSA requires businesses and landlords to submit quarterly digital updates using MTD-compliant software and a final declaration at the end of the tax year.

Who Does MTD ITSA Apply To?

MTD ITSA applies to individuals who meet the following criteria:

• Self-employed businesses with an annual turnover above £50,000 (phased in starting April 2026). Those with a turnover between £30,000 and £50,000 are expected to join from April 2027.
• Landlords earning rental income above these thresholds.

If you earn below these amounts, you're not required to join MTD ITSA yet, but you can voluntarily sign up.

Key Exemptions

You may not need to comply if:

• You're unable to use digital tools due to age, disability, remoteness, or other valid reasons (HMRC must approve).
• You're a non-resident landlord.
• You're not required to file an Income Tax Self Assessment return.

Key Deadlines

• April 2026: MTD ITSA becomes mandatory for businesses and landlords earning over £50,000 annually.
• April 2027: Businesses and landlords earning between £30,000 and £50,000 must comply.
• Future deadlines for those earning less than £30,000 will be announced later.

How to Comply with MTD ITSA

Compliance involves a few key steps, but with the right approach, it’s manageable. Here's what to do:

1. Check if It Applies to You

Start by confirming whether your income and business meet the MTD ITSA criteria. You can check this on HMRC’s website or consult with your accountant.

2. Choose MTD-Compatible Software

You’ll need approved software to maintain digital records and submit quarterly updates. Examples include Xero, Sage, QuickBooks, and FreeAgent. Make sure the software can directly integrate with HMRC’s system.

3. Maintain Digital Records

Keep track of all income and expenses using digital methods. Some software allows you to snap photos of receipts and update records in real time.

4. Submit Quarterly Updates

Every three months, you’ll provide HMRC with a summary of your income and expenses through your software. These updates are not final but give HMRC an overview of your earnings throughout the year.

5. File the End-of-Year Declaration

At the end of the tax year, you’ll confirm your figures and submit a final declaration. This serves as your official tax return for the year.

What Are the Benefits of MTD ITSA?

Although adjusting to MTD might feel overwhelming at first, it offers several advantages:

• Improved Accuracy: Digital records reduce manual errors often seen in paper submissions.
• Better Organization: Quarterly updates encourage regular record-keeping instead of the last-minute panic before the January tax deadline.
• Saves Time: Integrated software automates much of the process, freeing you to focus on running your business.
• Real-Time View of Your Tax Obligations: Instant updates mean you’ll always know where you stand with HMRC.

Common Questions About MTD ITSA

Do I Still Need an Accountant?

Yes, if your tax situation is complex or you need professional advice. Many accountants are familiar with MTD-compliant software and can help manage your submissions.

What Happens If I Don’t Comply?

Failing to adhere to MTD rules could lead to penalties. You might first receive a notice from HMRC, and persistent non-compliance could result in fines.

Can I Use Free Software for MTD ITSA?

Some software providers offer free versions for basic income and expense tracking. However, businesses with more complex accounting needs might require paid solutions.

What Counts as Digital Records?

This includes spreadsheets and software where you record income, expenses, and other tax-related data. Paper-only records don’t meet MTD requirements.

Practical Tips for MTD ITSA Success

1. Start Early Don’t wait until the last minute to switch to digital. Familiarize yourself with compatible software and start keeping records now.
2. Keep Personal and Business Finances Separate Consider a separate business bank account to make digital record-keeping simpler.
3. Set Reminders for Quarterly Dates Mark your calendar or enable alerts in your software for quarterly submissions.
4. Take Advantage of Software Features Some tools offer insights into cash flow, due taxes, and more. Use them to gain a better understanding of your finances.
5. Consult a Professional Seek advice from an accountant or tax advisor, especially if you’re uncertain about the rules.

Final Thoughts on MTD ITSA

Making Tax Digital for Income Tax Self Assessment is aimed at streamlining how you manage your taxes. While the transition may feel daunting at first, adopting digital practices now will save you headaches in the long run. By staying informed and proactive, you'll find that MTD ITSA can simplify your tax process and even help you manage your finances better.

If you’re unsure about any part of the process, reach out to Mollio for clarification. The sooner you prepare, the smoother your transition to MTD ITSA will be!