In short, ‘Making Tax Digital’ (MTD) for Income Tax Self Assessment (ITSA) will apply to individuals from April 2026 if their total gross income from self-employment or property exceeds £10,000 in a tax year.
However, before we take a closer look at Making Tax Digital and what it means to non-UK residents, particularly landlords and property owners, we should take a few minutes to understand what we mean by Making Tax Digital – MTD and its implementation.
Initially piloted back in 2017 and instigated by Her Majesty’s Revenue & Customs department (HMRC). Making Tax Digital is a Government initiative that sets out a bold vision for a digital tax system to “make it easier for individuals and businesses to get tax right and keep on top of their affairs.
With a full digitalisation of the UK tax system, it is hoped that this will prevent errors that currently cost the UK in excess of almost £10bn a year in lost tax revenue they can bank.
The thinking behind Making Tax Digital
The thinking behind Making Tax Digital is for the UK to have one of the most digitally advanced tax management systems in the world. As a service, it promises to make tax administration in the UK more effective, efficient, and accessible for taxpayers to get their taxes right.
Such is HMRC’s faith in Making Tax Digital that they have gone on record and suggested that “users will get the maximum benefits from Making Tax Digital – fewer errors, increased productivity, and better financial planning – by using the dedicated software.”
What’s the story so far regarding Making Tax Digital?
The first significant stage of Making Tax Digital was rolled out on April 1st 2019. This required all VAT-registered businesses in the UK with a turnover above the VAT registration threshold to file VAT returns using the Making Tax Digital-compatible software and digitally store financial records relating to VAT.
The scope of Making Tax Digital for VAT was further expanded on April 1st 2022, and all VAT-registered businesses are now required to follow these rules.
As a result, it now means that every small business owner and an individual taxpayer has access to an online business tax account that they can use to check their HMRC records and manage their details.
In its March 2020 evaluation of Making Tax Digital, the government reported that more than 1.4 million businesses had signed up for MTD for VAT and that over 4 million VAT returns had been successfully submitted using the Making Tax Digital-compatible software.
Furthermore, HMRC has reported that some 280,000 businesses in the UK with a turnover below the current VAT threshold have chosen to sign up to Making Tax Digital for VAT voluntarily to experience the many benefits digital record-keeping offers.
What’s the next step for Making Tax Digital?
Set to be introduced in 2024, Making Tax Digital will be extended to Income Tax, meaning sole traders, landlords, and others will need to report their earnings to HMRC entirely differently.
At this stage, any self-employed businesses or landlords with annual business or property income exceeding £10,000 will need to comply with MTD for ITSA rules from their next accounting period starting on or after April 6th 2024.
What changes can you expect Making Tax Digital for Income Tax to bring?
Most significantly, you will be required to keep detailed digital records of your income and expenses and use the Making Tax Digital-compatible software to report your financial data to HMRC every quarter (i.e. three months).
The Making Tax Digital-compliant software will automatically generate summary updates, which will be sent to HMRC online every quarter. These summaries will show just how much tax you owe based on the information you’ve provided, which should help you to better budget for paying your tax bill at the end of the tax year.
At the end of your accounting period, you will be required to finalise your business income and submit a final declaration (which will replace the current annual Self Assessment tax return). Within this, you will need to confirm the accuracy of the updates you’ve sent, with any accounting adjustments made (e.g. any reliefs or allowances claimed).
However, before all of this, you still need to send HMRC a Self Assessment tax return for the tax year before signing up for Making Tax Digital for Income Tax.
What Making Tax Digital means to non-UK residents
If you’re domiciled or resident outside the UK, you will only need to follow Making Tax Digital for Income Tax rules if your UK self-employment or receive income from property rental.
For Example
If you’re a landlord who doesn’t live in the UK or are considered a UK “non-dom”, the Making Tax Digital Income Tax Self Assessment (ITSA) rules will only apply to rental earnings from UK properties that are more than £10,000 per annum.
But remember, just because you no longer live in the UK, you may still be required to complete a tax return. If you are deemed a non-UK resident, completing a tax return may still be necessary if you have a UK source of income, even if you owe no tax.
As a business, you will have two years to voluntarily prepare and test the MTD ITSA service before its formal introduction.
Other Resources for Making Tax Digital
To help learn more about Making Tax Digital, HMRC has created various videos about Making Tax Digital for Income Tax. You can also view a recorded webinar on Making Tax Digital for Income Tax.
TTUK – Serving Clients Around the World
Led by a management team that has previously worked in the UK for HMRC, KPMG and Baker Tilly, The Taxman UK has been providing personalised professional online taxation services to non-residents for twenty years.
As a company, we have the expertise to solve a wide variety of UK tax issues for international clients. Our fresh approach and depth of thinking mean we are well equipped to handle all your UK taxation needs, no matter how complex, whether you require assistance to complete an annual Tax Return or want more specific tax advice.
To learn more about MTD or how The Taxman UK can help with your tax affairs, visit www.www.thetaxmanuk.com or email us at [email protected].