Making Tax Digital for the self-employed

This content is brought to you by Xero.

Everything you need to know about the upcoming Making Tax Digital for Income Tax Self Assessment changes.

The next phase of Making Tax Digital (MTD) is on the horizon, with MTD rules extended to income tax from 6 April 2024. This means that 4.2 million taxpayers earning above £10,000 from business and property will need to sign up ahead of the deadline. The new rules will affect self-employed people including freelancers, construction workers, side hustlers, and landlords.

VAT-registered sole traders will already be familiar with Making Tax Digital, but many others will need to get cloud-based accounting software in place so that they can comply with MTD for ITSA. Here’s everything you need to know about supporting your clients with the upcoming changes.

How will Making Tax Digital affect your self-employed clients?

Sole traders and landlords earning above £10,000 need to have MTD for ITSA compatible software in place before Making Tax Digital for Income Tax Self Assessment (ITSA) comes into effect on 6 April 2024. They will need to keep digital records and submit quarterly updates to HMRC, as well as an End of Period Statement (EOPS) at the end of the fourth quarter, and a final declaration that includes all other taxable income by 31 January every year.

Accountants will still be able to submit returns on behalf of their clients, but will no longer be able to do this from the HMRC website. You’ll need to send updates to HMRC via clients’ compatible accounting software. This includes your clients’ quarterly updates, EOPS and final declarations.

Your self-employed clients may already be familiar with MTD rules if they are VAT registered. As of April 2022, all VAT registered businesses are now required to keep digital records and submit VAT returns with MTD software.

When does MTD for ITSA start for self-employed clients?

MTD for ITSA rules apply from 6 April 2024.

Sole traders and landlords can sign up ahead of time to start getting used to MTD rules. Find out if clients are eligible for early MTD ITSA registration here.

What about clients that don’t follow the tax year?

For clients who follow the tax year, the digital start date is 6 April 2024. For clients that don’t follow the tax year, the digital start date is the day their accounting period begins, which will fall on or after 6 April 2024.

Will all your self-employed clients have to go digital?

All self-employed people and landlords with a total income (from business or property) above £10,000 will need to follow MTD rules for ITSA from 6 April 2024, unless digitally exempt.

If a client has multiple businesses or sources of property income, the income earned from all of them contributes to the £10,000 threshold.

Sole traders earning below this threshold can continue to use the old HMRC system for filing their returns.

What will clients need to submit for MTD for ITSA?

Starting from 6 April 2024, your self-employed clients will need to keep digital records of income and expenditure. There are three parts they’ll need to submit for MTD for ITSA:

1. Quarterly updates. These are summaries of business income and expenditure.
2. End of Period Statement (EOPS). They’ll need to submit one of these per year, for each source of income.
3. Final declaration. This is where clients will share details of all other taxable income, including investments and savings interest.

Can you sign clients up for MTD for ITSA?

Yes. To sign clients up to MTD ITSA, you’ll need an Agent Services Account (ASA). You can manage all your clients through a single account. Your client will need to have MTD for ITSA have compatible software in place first. You’ll then need to request authorisation from your client, via your ASA. You can find out more about how to do this on the gov.uk website.

Can self-employed clients opt-out of MTD for ITSA?

No. If a client is earning above the MTD ITSA threshold of £10,000, Making Tax Digital is not optional from April 2024. However, those that are digitally exempt do not need to follow MTD rules. This could include people who are elderly, have a disability, or live in a remote location. Requests to be exempt from MTD ITSA can be made on the gov.uk website.

Will self-employed clients need MTD software?

If they are not already doing so, your clients will need to start keeping digital records with MTD compatible software. Using MTD compatible software will also enable sole traders and landlords to submit their quarterly updates and annual submissions directly from the platform. By using software with additional features clients can also reduce the administrative burden of digital recordkeeping, like invoicing and expense capture.

Can self-employed clients use spreadsheets for MTD?

Some clients may wish to use bridging software, in which case you should advise them on the pros and cons of this. Using bridging software for MTD for ITSA is more complicated than using it for VAT.

Bridging software was popular during the first phase of MTD for VAT because it allowed businesses to continue using their spreadsheets for VAT returns. With MTD for ITSA, the self-employed will need to submit quarterly statements, EOPS and a final declaration, not just a single yearly return. This makes keeping all of the relevant records in a spreadsheet more difficult. Clients also need to keep to the digital linking rules.

There’s no risk of losing, deleting, or corrupting spreadsheet cells in cloud-based accounting software. HMRC recognised software acts as safe storage for all your clients’ financial records and will also help ensure compliance with MTD.

Do self-employed clients need to sign up for MTD for VAT and MTD for ITSA separately?

Yes. The systems are separate, so they may need to sign up for both. Some sole traders will need to sign up for MTD for VAT and MTD for ITSA, whereas others will only need to sign up for MTD for ITSA.

How should you prepare your clients and practice for MTD for ITSA?

The MTD for ITSA deadline might seem a little way off – but the sooner you start preparing your practice and clients for the change, the easier it will be to make the transition.

Steps you can take now include educating your team on MTD for ITSA, assessing your client base to see who needs to follow the new rules, and ensuring you have an Agent Services Account.

You should let your clients know about the changes, educate them on digital record-keeping and ensure they have MTD for Income Tax compatible software in place in plenty of time.  It is also worth considering signing up some clients early and testing the processes. The more time your clients can spend getting used to new digital tools, the easier you’ll both find the transition to Making Tax Digital.

Want more information on Making Tax Digital? You can keep up to date with the latest on MTD by bookmarking Xero’s Making Tax Digital for ITSA resource hub and MTD for ITSA page.

If you’re not yet a Xero partner, visit our Xero partner programme where you can find out more about becoming a partner and join over 100,000 accountants and bookkeepers using Xero in their practice. Get the tools and resources you need to succeed.

This content is brought to you by Xero.

The content team are the owners of AAT Comment.