Policy paper

Making Tax Digital for Income Tax Self Assessment for sole traders and landlords

Published 22 February 2024

Who is likely to be affected

Landlords and sole traders with business or property income over £30,000.

General description of the measure

Making Tax Digital for Income Tax Self Assessment (MTD for ITSA) requires businesses and landlords with qualifying income to maintain digital records and update HMRC each quarter using compatible software.

For individuals, MTD for ITSA will be introduced in two phases:

• from April 2026, for those with qualifying income over £50,000
• from April 2027, for those with qualifying income over £30,000

The government remains committed to the future introduction of MTD for ITSA to partnerships.

Policy objective

Making Tax Digital (MTD) will exploit the opportunities offered by digitalisation to make it easier for everyone to get tax right. Many other countries have already done this or have digital systems in development.

Errors in handling tax affairs contribute to the tax gap — the amount of tax that is due but goes unpaid. The tax gap for Self Assessment businesses is around 18.5%, or £5 billion. Using software to keep digital records and make regular updates has been shown to reduce the potential for error and time spent making corrections, and thus support business productivity.

Digitalising our service will bring customer benefits by:

• reducing the risk of unintentional customer errors
• saving them time when they come to submit their end-of-year tax return
• supporting wider productivity and less time managing paperwork through use of digital tools
• enabling HMRC to better tailor services to customers

Background to the measure

MTD for ITSA is the cornerstone of HMRC’s commitment to modernising the way small businesses handle their tax and reducing tax lost to error.

Originally announced at Budget 2015, and following formal consultation in 2016, HMRC implemented the first phase of MTD from April 2019 for VAT-registered businesses.

Building on the successful introduction of MTD for VAT, the government announced in December 2022 that MTD for ITSA will be introduced for businesses, self-employed individuals and landlords with income over £50,000 from April 2026. Those with income over £30,000 will be mandated from April 2027.

In Autumn Statement 2023, the government published the ‘Making Tax Digital Small Business Review Outcome’, setting out how MTD for ITSA addresses the needs of smaller businesses. At the same time the government introduced new simplifications into the design of MTD for ITSA aiming to minimise potential burdens and to streamline processes for all using it.

This tax information and impact note supersedes the previous MTD for ITSA tax information and impact note that was published in September 2021. It reflects the changes in scope and timelines announced by Written Ministerial Statement on 19 December 2022, and policy amendments and improvements at Autumn Statement 2023.

Detailed proposal

Operative date

Businesses, self-employed people and landlords will be required:

• to operate MTD from 6 April 2026 in relation to their trading and property income chargeable to Income Tax and Class 4 National Insurance contributions, if their total qualifying income from these income sources for a tax year exceeds £50,000

• to operate MTD from 6 April 2027 in relation to their trading and property income chargeable to Income Tax and Class 4 National Insurance contributions, if their total qualifying income from these income sources for a tax year exceeds £30,000

They will:

• keep their records digitally
• provide digital quarterly updates
• be able to provide their ITSA return information to HMRC through MTD compatible software

Current law

Section 60(1) to (3) of the Finance (No. 2) Act 2017 inserted section 12C and Schedule A1 into the Taxes Management 1970 (‘TMA 1970’). Schedule A1 describes which customers are potentially in scope to follow the MTD for ITSA rules. Schedule A1 also provides the statutory framework and power to make regulations about the detailed operation of MTD for ITSA. Section 60(1) to (3) come into force on such day as the Treasury may by regulations made by statutory instrument appoint.

Section 61 Finance (No.2) Act 2017 introduced Schedule 14 to that Act, which makes amendments to TMA 1970 and various other enactments in consequence of section 60 coming into force. These provisions also come into force on such day as the Treasury may by regulations made by statutory instrument appoint.

The Finance (No. 2) Act 2017, Sections 60 and 61 and Schedule 14 (Digital Reporting and Record-Keeping) (Appointed Day) Regulations 2021 will bring the these provisions into force on 6 April 2024. The Income Tax (Digital Requirements) Regulations 2021 made regulations under Schedule A1 TMA 1970, and these again will come into force on 6 April 2024.

Proposed revisions

The new MTD for ITSA regulations require a relevant person to keep and preserve their tax records electronically and to submit reports to HMRC using approved software. A report of the business’s trading or property income, allowable expenditure and claims for allowances or reliefs against such income must be submitted in relation to each tax year. Interim cumulative reports must be submitted quarterly on fixed dates that are set out in the regulations.

A draft of these regulations was published between December 2023 and January 2024 for technical consultation.

Summary of impacts

Exchequer impact (£ million)

2023 to 2024	2024 to 2025	2025 to 2026	2026 to 2027	2027 to 2028	2028 to 2029
—	negligible	+25	+120	+465	+780

These figures cover Making Tax Digital for Income Tax and digital prompts. These figures have been certified by the Office for Budget Responsibility as of Spending Review 2020, Autumn Budget 2021, Spring Budget 2023, and Autumn Statement 2023. The figures reflect the latest Office for Budget Responsibility forecasts.

Economic impact

This measure is not expected to have any significant macroeconomic impacts.

Impact on individuals, households and families

There is expected to be no impact on family formation, stability or breakdown.

Equalities impacts

The government has been clear that if a business cannot go digital, it will not be required to do so.

MTD for ITSA is intended to help businesses get their tax right, with mandatory use of digital record keeping and using MTD compatible software to provide HMRC updates and returns digitally. HMRC continues to work with the MTD Accessibility Working Group and the Additional Needs Working Group to support all customers.

Businesses that are already exempt from engaging with HMRC through other mandatory digital channels, for example for MTD for VAT, will be exempted from the MTD for ITSA requirements.

Where a business is not already exempt from engaging with HMRC digitally, they may request that HMRC consider an MTD exemption so they will not have to meet the MTD requirements. The exemptions under MTD for ITSA mirror those for MTD for VAT that have operated successfully since its introduction in April 2019.

HMRC will continue to ensure that clear guidance is provided and information is easily accessible for digitally excluded taxpayers about the exemption process. Taxpayers may apply to be exempted from MTD requirements through non-digital means, for example in writing or by phone.

To ensure the widest possible access to software that will meet the MTD for ITSA requirements, HMRC is working closely with software developers to make sure that there are several software products that cater for those with cognitive, motor, visual and hearing difficulties. Where a person already complies with requirements to send information electronically and uses assistive technology, the MTD requirements should not impose additional costs to meet their accessibility needs.

For those moving to digital, especially those needing extra support, HMRC’s customer support model includes:

• a multi-layered approach stretching across:
  • agents
  • third party software support
  • telephony support
  • webchat
  • HMRC’s Extra Support service
• accessible online content including recorded webinars, YouTube videos and e-learning
• GOV.UK content including:
  • help pages
  • signposting to information, guides, and to local or third-party providers of digital skills courses, or support already provided by external providers

HMRC will also continue to work across multiple channels supporting as many taxpayers as possible to move onto digital services.

HMRC has not identified any impacts on other groups sharing protected characteristics.

We continue to monitor equalities impacts, including (where identified) on groups with protected characteristics, through design and delivery of MTD.

A full impact assessment is not recommended at this point.

Impact on business including civil society organisations

Who is affected

It is expected that around 780,000 people with business or property income over £50,000 will join the MTD for ITSA service in from April 2026 with a further 970,000 joining from April 2027.

These measures are expected to improve businesses’ experience of dealing with HMRC as managing their tax affairs will be simpler. Once businesses are used to operating the new MTD processes, we anticipate that they will find that MTD makes it easier for them to get things right and reduce errors.

HMRC announced several simplifications to the design of MTD for ITSA in the Autumn Statement on 22 November 2023, to make it easier for everyone, including the smallest businesses, to comply with MTD and experience the benefits of digitalisation.

Although the government has confirmed that it will keep the decision on whether to mandate businesses and landlords with income below £30,000 to use MTD for ITSA under review, this group can still sign up voluntarily.

Costs

HMRC estimates a transitional cost to business of around £561 million and a net increase in the continuing costs of tax compliance of around £196 million for those businesses mandated to use MTD for ITSA. For each business within scope this equates to an estimated average transitional cost of £320 and an average annual additional cost of £110.

Broken down into the two mandation cohorts, HMRC estimates that those within the £30,000 to £50,000 threshold may incur an estimated average transitional cost of £350 and an average annual additional cost of £110. Those in the above £50,000 threshold may incur an estimated average transitional cost of £285 and an average annual additional cost of £115.

Those already operating MTD for VAT or using digital tools for business administration may incur relatively little cost. Other less digitally capable businesses, may be more affected by one-off transitional costs as they move to MTD processes.

In assessing these impacts, HMRC has incorporated findings from the businesses already signed up to MTD, as well as feedback from engagement with external stakeholders about their experience of the costs to businesses in complying with MTD. In particular, HMRC has worked extensively with stakeholders from the accountancy, business and software communities to update its assumptions underpinning the cost estimates, to ensure they are robust and a realistic representation.

Standard Cost Model (SCM) methodology was used to estimate administrative burden impacts. This methodology allows HMRC and HM Treasury (HMT) to apply a standard set of principles for estimating administrative burdens across all impact assessments. The assessment only considers the costs and savings strictly related to meeting MTD tax obligations. It does not include the wider benefits that HMRC expects businesses may see and does not reflect the broader picture of taxpayer experience and cannot measure all consequential and longer-term benefits. The SCM only captures the costs to business of retaining or disclosing information to HMRC or to third parties and therefore cannot be used to estimate wider benefits of MTD to businesses.

Costs invariably will differ from business to business and are influenced by factors including size and complexity of the business, degree of digital capability and cost and functionality of the software solution employed.

Transitional one-off costs could include some or all of the following:

• time spent in familiarisation with the new MTD obligations (digital record keeping and quarterly submission of information)
• in-house training
• the purchase of new hardware or upgrading of existing hardware (expected to affect a small minority)
• additional accountancy or agents’ costs

Transitional costs can be offset against the business’ profits for tax purposes.

Continuing costs could include:

• cost of software subscription for those moving to MTD compatible software, from either paper or spreadsheet systems

• additional time for making quarterly updates
• any cost of bridging software to provide MTD compatibility for those who prefer to continue using spreadsheets
• marginal increases in some existing software costs to provide MTD compatibility

Software and agent costs for business purposes, are tax deductible.

Benefits

Evidence from the delivery of MTD for VAT indicates that, once businesses have adapted to keeping closer to real-time digital records and using compatible software, they will find the new process makes it easier for them to get their tax affairs right first time and reduce the potential for errors. 

Moving to digital record keeping and using compatible software may also present wider productivity benefits for some businesses, particularly where MTD acts as a catalyst for digitalising other parts of their business.

HMRC anticipates that these changes will also have positive impacts on agents acting for businesses, freeing up their time for more complex tasks. Businesses that currently have an agent, and are recording income and expenditure digitally, may choose to make the ITSA quarterly updates themselves. Businesses who do not currently maintain their books and records digitally, should find the process of submitting their end of year return simpler, as all their records are up to date and in one place. This will help to free up time for both agents and their clients, so they can focus on other business activities.

Digital record keeping requirements

Through MTD, businesses and landlords will be required by law to keep digital records. This will involve a transitional cost for businesses not already doing this. They will need to purchase, or acquire a free version of, software and become accustomed to using it.

HMRC has been working with the software industry to ensure that businesses needing to update their accounting systems will have access to affordable software products. The government has committed to there being free software products for the smallest businesses with straightforward affairs.

When MTD for VAT was introduced, more than 250 existing subscription VAT software products were updated at no cost to customers to provide MTD for VAT capability. The software industry has also provided a number of free-to-use products, despite there being no requirement for them to offer free VAT products. We expect to see a similar positive response from the software industry to the mandation of MTD for ITSA, bringing choice to the market and competitive pricing.

Estimated one-off impact on administrative burden (£ million)

One-off impact (£ million)	£30,000 to £50,000 threshold	Above £50,000 threshold	Total mandated population above £30,000
Costs	338	223	561
Savings	—	—	—

Estimated continuing impact on administrative burden (£ million)

Continuing average annual impact (£ million)	£30,000 to £50,000 threshold	Above £50,000 threshold	Total mandated population above £30,000
Costs	110	90	201
Savings	2	3	5
Net impact on annual administrative burden	+108	+88	+196

Numbers do not sum due to rounding.

Operational impact (£ million) (HMRC or other)

There will be both IT and resource costs for HMRC in developing, applying, and policing this measure, and in updating guidance.

HMRC IT and non-IT costs for this next phase of MTD expansion are expected to be in the region of £0.5bn to the end of March 2028.

Other impacts

HMRC is required to consider the justice impact test and rural proofing measures in relation to their impacts on rural communities and the justice system.

HMRC’s assessments suggest any impact is likely to be negligible. Mitigations are in place for those whose rural location impacts their internet access to the point where it is not feasible to operate MTD, as discussed in the ‘Equalities impacts’ section.

This measure does not fall within the scope of the environmental principles duty.

Other impacts have been considered and none have been identified.

Monitoring and evaluation

HMRC’s communications programme includes work to build software developer, agent and taxpayer readiness, to promote inclusion in the large-scale public beta testing programme beginning in 2025 and encourage voluntary early adoption of MTD for ITSA.

HMRC is committed to monitoring and formally evaluating the impact of MTD for ITSA, including both customer and revenue impacts. This will build on HMRC’s track record in successfully evaluating MTD for VAT and publishing the findings. Independent social research will be undertaken both before and after MTD for ITSA is introduced to gather evidence of customer impacts and behaviour change. Self Assessment data will be used to monitor take-up and estimate additional tax revenue due to MTD. The evaluation will take until at least 2029, when all data for the 2027 to 28 tax year becomes available for analysis.

Further advice

If you have any questions about this change, please contact Ady Garrett by email at: [email protected].

Declaration

Nigel Huddleston MP, Financial Secretary to the Treasury has read this tax information and impact note and is satisfied that, given the available evidence, it represents a reasonable view of the likely costs, benefits and impacts of the measure.