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Making Tax Digital for Income Tax

Making Tax Digital for Income Tax Self-Assessment (MTD for ITSA) is a new government initiative to digitalise the UK tax system. MTD for ITSA will apply from April 2024 for unincorporated businesses and landlords with total business or property income above £10,000 per year. MTD for ITSA replaces the need for a self-assessment tax return.

VitalTax

What is New?

Digital Records: Businesses and landlords will be required to keep their records digitally and submit their business income and expenses to HMRC using MTD-compatible software. HMRC has approved spreadsheets as an acceptable solution for keeping digital records. You can still use your current spreadsheet template and submit data via approved Making Tax Digital bridging software.

Quarterly Submissions: Taxpayers will need to provide quarterly business income and expenses for each self-employment and property business. This information must be linked to the original digital records. After each submission, taxpayers will be able to review up-to-date information about their tax liabilities.

Annual Submissions: In addition to the quarterly submissions, there will be an option to submit annual adjustments, reliefs and allowances. At the end of the tax year, each mandated business income source (self-employment and property businesses) will need to be finalised; this will be done by agreeing with a declaration known as an End of Period Statement (EOPS). An EOPS will need to be provided for each income source separately.

Final Declaration (Crystallisation): Once all the necessary quarterly and annual information for all income sources is submitted and all EOPSs are provided, taxpayers will need to finalise their overall tax position for the tax year by providing a Final Declaration.

Join the Pilot

HMRC has already approved VitalTax as a bridging solution for Making Tax Digital for Income Tax Self-Assessment. You can start using VitalTax for ITSA now, absolutely free of charge, and learn more about how VitalTax can help you with your MTD compliance. This will give you enough time to adapt your business before a mandatory deadline in April 2024. Please get in touch with us if you would like to join the HMRC pilot and request a demo.

Making Tax Digital – A Visual Guide

Below is a diagram representing the main steps in Making Tax Digital for Income Tax compliance. Click on each step to read more information.

Income Sources

With MTD for Income Tax, different income sources involve different compliance requirements.

Business income sources: These include self-employment, UK and foreign property businesses. MTD for Income Tax legislation mandates digital record-keeping for these businesses. Taxpayers will need to provide quarterly income and expenses for each business income source. VitalTax will automatically retrieve from HMRC all business income sources associated with your National Insurance number.

Information for all non-business income sources can be submitted annually. These include employment income, bank and building society interest, dividends, capital gains, etc. MTD for Income Tax legislation does not mandate digital record keeping and quarterly submissions for non-business income sources. You will be able to configure your VitalTax account to include any non-business income sources that you want to declare. The data provided for these income sources will be used to calculate your tax liabilities and will be included in your Final Declaration.

Quarterly Updates for Income and Expenses

Taxpayers will need to submit quarterly updates for income and expenses for each business income source. The income and expenses figures should be calculated from the original digital records that you can keep in your Excel spreadsheet. You can continue using all your preferred Excel formulas to calculate figures for income and expenses for each quarter.

HMRC requires different information for quarterly updates depending on the income source and annual turnover. If the annual turnover for an income source is expected to be less than the VAT registration threshold, you will not be required to submit a detailed expenses breakdown; instead, you can provide a consolidated expenses summary for the quarter. For example, for the self-employment quarterly submission for an expected turnover of less than the VAT registration threshold, you will only need to provide turnover, other income not included in turnover, and a single consolidated expense figure.

Let’s now look at the example of a sole trader, whose annual turnover from a business is expected to be equal to or to exceed the VAT registration threshold. In that case, you will need to provide a detailed breakdown of expenses, such as staff costs, travel costs, premises running costs, advertising costs and other expenses categories. You can find a detailed list of the required expense categories for each income source in VitalTax.

It is also worth mentioning that quarterly updates for income and expenses for furnished and non-furnished UK properties will need to be submitted separately, even if they are part of the same UK property business. The same applies to foreign property. You will need to submit separate quarterly updates for furnished EEA property and other foreign property businesses. For example, let’s assume the taxpayer has a self-employment business and a UK rental property business for furnished and non-furnished properties. In that case, you will need to submit three different updates for income and expenses every quarter: one for the self-employment business and one each for the furnished and non-furnished UK properties.

HMRC expects quarterly information to be up to date with the digital records but does not require a legal declaration for the quarterly submission. You can amend your quarterly submission at any time before finalising the annual income source data.

Tax Calculations

Every quarterly submission will trigger tax calculations. You can review your up-to-date tax calculations in VitalTax. This will include a summary of your taxable income and a detailed breakdown of your Income Tax and National Insurance contribution calculations, including your savings, capital gains, dividends, allowances, reliefs, and other data.

Annual Income and Expenses Submission

With VitalTax, you can also provide figures for annual income and expenses, in addition to the quarterly submissions. This is an optional submission and is not mandated by MTD for Income Tax legislation. We developed this functionality to facilitate collaboration between taxpayers and their agents and help agents to optimise their workload.

When you submit annual income and expenses figures, VitalTax will retrieve the information that HMRC holds as a result of all quarterly submissions and apply the necessary adjustments. These adjustments will guarantee that the final annual income and expenses figures that HMRC holds agree to your annual calculations.

Submitting quarterly income and expenses updates could be costly and troublesome for agents. Providing quarterly updates could easily be delegated to clients, mainly because quarterly submissions do not require any legal declaration. Quarterly submissions must be as accurate as possible but can still be amended at any point or adjusted at the end of the financial year.

Agents can continue submitting annual returns and providing annual figures for income and expenses for their clients, as before MTD. VitalTax will automatically generate all the necessary adjustments behind the scenes to ensure that accurate annual figures are used when finalising income sources at the end of the year.

Annual Adjustments, Reliefs and Allowances

You will be able to provide additional data as an annual submission. This information will include, for example, basis period and accounting adjustments, any other business income not included in quarterly updates, income not taxable as business profits, overlap relief, allowances related to your business and additional information.

End of Period Statement

Once all the quarterly updates for income and expenses have been submitted and all the relevant adjustments, reliefs and allowances have been provided, the user must complete an End of Period Statement.

End of Period Statement (EOPS) is a process that allows you to finalise the annual profit or loss for a business income source. An EOPS must be completed for each source of business income separately. For example, if a taxpayer has one self-employment business and one property business, they will have to complete two EOPSs, one for each source of income.

It is straightforward to complete an EOPS with VitalTax. When the user is ready to finalise a business income source, VitalTax will display the profit and loss summary for that income source. The user can then review this information and accept a legal declaration confirming that the information provided is correct and complete. It is that simple!

Final Declaration (Crystallisation)

The Final Declaration is a process that allows the taxpayers to finalise their tax position for the tax year. This process brings together all the data that taxpayers need to provide to HMRC to reach their final tax liability for a specific year.

Before providing a Final Declaration, taxpayers must declare that they have considered all their possible income sources and that all the End of Period Statements for their business income sources have been provided.

Taxpayers will have an opportunity to create loss claims against income sources for a specific tax year and declare voluntary Class 2 National Insurance contributions and other disclosures at this stage.

VitalTax will show the final tax calculations, with a detailed breakdown of Income Tax and National Insurance contribution calculations. The user must then review the tax calculations and accept a legal declaration confirming that the information provided is correct and complete. Once the user agrees with a declaration, VitalTax will submit the Final Declaration, finalising the taxpayer’s tax liabilities for the tax year.

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