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What are the implications of MTD for ITSA for SMEs?

The introduction of Making Tax Digital for Income Tax Self-Assessment (MTD for ITSA) is going to create some upheaval within the SME sector.

No doubt, some of you are already using MTD-compliant software to file your taxes or your accountant is doing it for you.

However, if you are yet to make this change, you should be aware that this will soon become the standard for ITSA.

It is best, therefore, to make the necessary changes to your processes now, rather than having to scramble to remain compliant when MTD for ITSA comes in.

What is MTD for ITSA?

Commencing April 2026, MTD for ITSA will mandate landlords and self-employed individuals, including partnerships, with annual business or property income over £50,000 to submit quarterly updates to HM Revenue & Customs (HMRC).

This threshold will extend to those with income over £30,000 from April 2027.

The initiative is part of the Government’s broader strategy to digitise the tax system, aiming to make tax administration more efficient, effective, and easier for taxpayers to get their tax payments right.

Impact on unincorporated businesses

Limited companies are already familiar with digital reporting through the Corporation Tax digitalisation and the Making Tax Digital for VAT regimes but unincorporated businesses, like sole traders and partnerships, will need to readjust the way they file taxes.

Traditionally reliant on annual Self-Assessment tax returns, these businesses must now transition to a digital-first approach, maintaining digital records and submitting income and expense updates to HMRC every quarter.

This move necessitates a re-evaluation of current bookkeeping practices and possibly an investment in new software or training to meet the MTD requirements.

You may need to look into your:

  • Software compatibility: One of the first steps is to ensure that your business’s accounting software is MTD-compatible. This software will be crucial in compiling the necessary financial information and facilitating direct communication with HMRC’s systems. Alternatively, you could outsource this to a qualified accountancy professional to avoid the stress and hassle of doing it yourself.
  • Record-keeping: Digital record-keeping becomes mandatory under MTD for ITSA. Businesses must ensure that their financial transactions are recorded digitally, providing a real-time, accurate reflection of their financial position.
  • Advisory support: Engaging with an accountant or bookkeeper who is well-versed in MTD regulations can provide invaluable guidance. They can assist in software selection, setup, and ensuring that your quarterly updates are accurate and timely.
  • Financial planning: With the introduction of quarterly updates, businesses will have a clearer, ongoing view of their tax liabilities. This information can be instrumental in financial planning, helping businesses manage cash flow more effectively and plan for tax payments.

In short, while the impact on unincorporated businesses is likely to be significant, we believe that with proper planning and a proactive approach, this could be beneficial to you and your business.

How to prepare for the transition

Preparation is key to a seamless transition to MTD for ITSA.

You should start by assessing your current systems and processes and identifying any gaps in digital record-keeping and reporting capabilities.

The next step involves selecting suitable MTD-compatible software, considering factors such as functionality, ease of use, and integration with existing systems.

Finally, businesses should consider undertaking training for staff to ensure they are comfortable with the new processes and software.

Alternatively, you could outsource these processes to ensure that your financial information is correct and that you remain compliant with the new legislation.

Again, an accountant can be an invaluable asset when it comes to MTD for ITSA, and we can give you the advice and guidance your business needs to grow and thrive.

For more information, please get in touch with us.