Making Tax Digital for Income Tax

Introduction

For several years HMRC have been in the process of transforming their systems with a view to modernising their management of data and interactions with taxpayers for the digital age. The project is known as Making Tax Digital (MTD) and encompasses different taxes and several processes, which were first consulted on in 2016. Some elements of the plan are already in place (e.g. MTD for VAT), but MTD for Income Tax (MTD for ITSA) has been deferred a number of times due to its complexity. MTD for ITSA requires digital record keeping and quarterly digital reporting of receipts and expenses in respect of trading businesses and property businesses that are subject to income tax, subject to certain exceptions.

Regulations were originally laid on 23 September 2021 clarifying which taxpayers were to be affected and stating that MTD for ITSA would come into effect from April 2024 for most taxpayers. These original regulations were revised following the laying of new regulations on 22 February 2024, which included the deferral of the start date to April 2026. Further changes were announced in the Autumn Budget on 30 October 2024. This note is a high-level summary of the current position, including the latest proposals.

Entities and businesses affected

The initial phase of MTD for ITSA from April 2026 only affects individuals who are carrying on businesses in their own right, subject to certain exemptions (see below). Partnerships will be brought into MTD for ITSA at a later undefined date. Trustees, personal representatives and non-resident companies are all exempt from MTD for ITSA. The regulations include exemptions for foster carers and individuals who do not hold a national insurance number as at 31 January before the start of the tax year for which records would otherwise be required. In the initial phase from April 2026, only individuals with over £50,000 of business receipts will be mandated to enter the regime. From April 2027, this will be extended to those with business receipts of more than £30,000. The government announced in the Autumn Budget 2024 that they intend to reduce this threshold to £20,000 by the end of the current parliament in 2029/30.

Most trading and property businesses carried on by individuals will be subject to MTD for ITSA if profits would be chargeable to income tax except where the income derives from “excluded activities”. These are Lloyds Underwriting activities and property receipts from collective investment schemes (e.g. REIT distributions and property income dividends).

As MTD for ITSA only applies in years where profits would be chargeable to income tax, non-UK businesses of non-UK residents should automatically fall outside the regime. However, there are currently no special provisions for split year treatment, suggesting that quarterly reporting of a foreign business is potentially required throughout years of arrival to and departure from the UK, even though only part of it is likely be taxable.

Exemptions for individuals

Income exemption

In the revised regulations, MTD for ITSA will not be mandated for individuals with gross receipts from their trading and/or property businesses of £50,000 or less for 2026/27 or £30,000 or less from 2027/28 onwards. As noted above, a further reduction to £20,000 is expected by 2029/30. Receipts from all relevant businesses are aggregated. For example, an individual with trading receipts of £29,000 and gross rents of £22,000 would be required to use MTD for ITSA for both businesses because the combined receipts exceed £50,000. Individuals who are eligible for the Income Exemption can elect to use MTD voluntarily, provided they are not otherwise excluded.

The receipts threshold in the regulations is based on the amounts that were reported on the last tax return that was due before the start of the tax year under consideration. For example, MTD for ITSA would not be expected to apply in 2026/27 if the total business receipts on the 2024/25 tax return were £50,000 or less (i.e. the return due by 31 January 2026). If the period considered in the tax return is not 12 months, the receipts are adjusted to 12 months’ worth.

An individual who is initially mandated to use MTD for ITSA due to exceeding the receipts threshold may subsequently qualify for exemption if receipts drop below the threshold for three years in a row. 

Foreign income of non-UK domiciled individuals

The regulations as they currently stand include an exemption from MTD for ITSA for foreign businesses of individuals who are neither domiciled nor deemed domiciled in the UK. It was confirmed in Autumn Budget 2024 that the tax rules for non-UK domiciled individuals will be repealed from 6 April 2025 and replaced with a residence-based regime. The new regime broadly allows individuals to claim an income tax exemption for foreign income in their first four years of UK residence. The draft legislation includes a provision to remove the MTD exemption for non-UK domiciled individuals. It does not include a replacement exemption for those who are eligible for relief under the new regime. It therefore appears that MTD obligations will apply to foreign businesses, even if the profits are expected to be fully relieved from income tax.

Digital exclusion

Individuals can apply for an exemption from MTD for ITSA if they are digitally excluded. This includes those for whom use of computers would not be reasonable or practical due to age, disability or location, and those who object to using computers on religious grounds. Individuals who have already been granted this exemption for MTD for VAT do not need to reapply for MTD for ITSA.

Requirements under MTD for ITSA

Digital records and reporting

MTD for ITSA requires taxpayers to obtain software that is compatible with HMRC’s system and use it to maintain digital records, send quarterly reports to HMRC of income and expenditure and submit a final declaration. A number of administrative easements were announced at the Autumn Statement on 22 November 2023 including allowing joint property owners to exclude expenses in respect of jointly-held properties from their in-year submissions.

Quarterly reporting periods can follow tax year quarters or calendar year quarters, as follows:

The deadlines for quarterly reports are the 7th of the month after the tax year quarter end (e.g. 7 August 2026 for the first quarter to 5 July or 30 June 2026). The taxable profits will need to be finalised by 31 January following the end of the tax year as part of the final declaration process (i.e. the same as the current tax return filing deadline).

HMRC state that the final declaration will replace the Self Assessment tax return and will be due by 31 January following the end of the tax year. Prior to submitting the final declaration, the individual needs to have provided details of non-business income and any reliefs to HMRC in a digital format.

Timing of MTD for ITSA

Where a relevant business is already being carried on immediately before 6 April 2025, and the individual is not exempt, MTD for ITSA will be mandated from 6 April 2026. For businesses that start later, MTD for ITSA will generally be mandated from 6 April of the third tax year in which the business exists.

It is possible in theory to start using MTD for ITSA now as part of HMRC’s pilot, but the conditions for joining are very restrictive. In particular, non-UK residents and taxpayers with income from partnerships or trusts, are currently ineligible.

Find out more…

This note reflects the law in force as at 5 November 2024 together with announcements made on 30 October 2024. Further changes may be made prior to 6 April 2026. This note does not cover all aspects of this subject. To find out more about any aspect of the above, please discuss with your usual Deloitte contact. If you do not have a usual contact, please contact Rachel McEleney (rmceleney@deloitte.co.uk). For further information visit our website at www.deloitte.co.uk.