HMRC has recently provided further information on who will fall within the scope of its new Income Tax Self Assessment regime which will come into force in April 2024. Beneficiaries of certain trusts or partners in a partnership who may have not previously thought about the impact of MTD might now be affected, and need to consider whether they should sign up.
HMRC has specifically outlined that individuals who fall within one of the following categories cannot yet sign up for MTD ITSA:
Trustees, including charitable trustees or trustees of non-registered pension schemes
Personal representatives of deceased persons
Lloyd’s members, in relation to their underwriting business
In addition, you can apply for an exemption from using MTD ITSA if you consider yourself to be “digitally excluded” and one of the following apply to you:
It’s not practical for you to use software to keep digital records or submit them — this may be due to your age, disability, location or another reason
You are a practising member of a religious society (or order) whose beliefs are incompatible with using electronic communications or keeping electronic records.
If none of the above apply to you and you are registered for Self Assessment and get income from self-employment, property (or both) and your total ‘qualifying income’ is more than £10,000 then you will need to sign up for MTD ITSA.
HMRC has also provided further guidance on what is included in your qualifying income. Your qualifying income is the total gross combined trading and property income that you get in a tax year (6 April to 5 April) before deducting any expenses. This means that if you have income from more than one of these sources, such as income from a property and from self-employment, then you will need to add together the income from both sources to see if the total exceeds £10,000. Any other income you might receive, such as employment income, interest or dividends, is not counted towards your qualifying income.
If your income is not for a full 12 months (for example, if you have only been renting out a property for 6 months) then HMRC will annualise the income by pro rating it to calculate your rental income for 12 months. This will be your qualifying income.
Income from jointly owned property
If you receive income from a property that is jointly owned by you and someone else, then it is only your share of the total property income that is counted towards your qualifying income. For example, if you jointly own a property that generated property income of £28,000 during the tax year, and you received 50% of the rental income, then your qualifying income from that source would be £14,000 and you would therefore need to sign up to MTD ITSA.
Disguised investment management fees and income based carried interest
These types of income form part of your qualifying income as they are treated as profits of a deemed trade.
Income from a partnership
If you receive income from a partnership, this will not form part of your qualifying income, unless you receive disguised investment management fees or income based carried interest as mentioned above. Partnerships themselves will need to start reporting under the MTD ITSA requirements but this is planned to come into effect in April 2025.
Income from trusts
If you are a beneficiary of a bare trust, any property income or trading income that you are entitled to will count towards your qualifying income. Similarly, if you are a beneficiary of an interest in possession trust, then any property or trading income that is paid directly to you and bypasses the trustees will count towards your qualifying income.
Residence and domicile
If you are resident and domiciled in the UK, then all property income and self-employment income will count towards your qualifying income. This means that you will need to take account of foreign income as well as income arising in the UK.
For example, if you are self-employed in the UK but rent out a property abroad, income from both sources will count towards your qualifying income. This follows the general rule that if you are a UK resident and domiciled, your worldwide income will fall within the scope to UK tax.
The same applies if you are deemed domiciled in the UK. You will be deemed domiciled if either you were a UK resident for 15 of the previous 20 years, or you are currently a UK resident and were born in the UK with a UK domicile of origin which may have been displaced since then. If you bring any foreign property or self-employment income to the UK from a year in which the remittance basis applied to you, that income will not contribute towards your qualifying income. The remittance basis may apply if you are domiciled outside the UK.
If you are domiciled outside the UK, any foreign property or foreign self-employment income you receive will not count towards your qualifying income, but your UK property income and UK self-employment income will, regardless of whether you are taxed on the remittance basis or arising basis.
What we know so far:
MTD for ITSA will kick in from April 2024; a pilot scheme is underway now.
If you are within MTD, you’ll need to send quarterly summaries of business income and expenses to HMRC using MTD-compatible software. You will have up to a month after the end of the quarter to do so.
This will give an estimated calculation of tax owed, which should help you set aside enough money to pay your annual tax bill.
At the end of the year you will confirm your business profit via an End of Period Statement (EOPS) which will include any tax/accounting adjustments.
You will also submit a Final Declaration (the MTD equivalent of the current Tax Return) which you cannot do until you submit your EOPS. This will confirm how much tax is due for the year.
There are transitional rules for businesses who don’t currently have a 31 March / 5 April year end – see our article for further guidance.
Please contact Vardeep Kular in our Personal Tax team, if you have any queries in relation to this article.
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