Data obtained by Saffery Champness reveals that 1,015 taxpayers have voluntarily signed up to HM Revenue & Customs’ (HMRC’s) Making Tax Digital (MTD) for income tax pilot in the three years since it was launched. Of these voluntary users, 218 or approximately 21% are landlords with property income.
The data, acquired from HMRC via a freedom of information request, shows that the number of annual sign ups has fallen from 877 in 2018-19 to only 26 in the most recent full year, 2020-21. HMRC has said that it restricts numbers in the early stages of these kinds of pilots so that any issues arising only affect a small number of customers.
A subsequent request for information made to HMRC in January 2022 revealed that only nine taxpayers were taking part in the MTD for income tax pilot.
In September 2021, HMRC announced that the requirement to operate MTD for income tax, which will apply to taxpayers with business and/or property income over £10,000, including sole traders, landlords and partnerships, will be delayed by a year until April 2024, in recognition of the disruption faced during the pandemic.
MTD replaces the existing reporting system for income tax through the annual self-assessment return, with a quarterly summary update of business income and expenditure based on the taxpayers’ digital records, with a finalisation process at the end of the year.
The MTD pilot for income tax was launched by HMRC in 2017, with a select group of invited sole traders, landlords and their agents participating. By 2020, following newly released additional functionality, HMRC estimated that over one million landlords and sole traders are now eligible to volunteer for the pilot.
In total, HMRC estimates that 4.2 million taxpayers will be mandated to operate MTD for their income tax obligations.
Zena Hanks, a partner in the Private Wealth Team at Saffery Champness, comments:
“It is pleasing that HMRC have reaffirmed their commitment to robustly testing each element of the MTD process to resolve potential issues in advance of the taxpayer population being mandated to use the system as of April 2024. However, the relatively small number of participants involved in the pilot isn’t likely to fill people with confidence in the effectiveness of that testing, or indeed the results it has yielded thus far.
“While there may be benefits to HMRC keeping the number of guinea pigs in the MTD income tax pilot fairly small, as any issues that arise can be handled with only a few taxpayers affected, it’s hardly a vote of confidence in the new system, which in just over two years will be made mandatory for over four million sole traders and landlords throughout the UK. Nor does it indicate much eagerness on the part of taxpayers and their agents to embrace the new system, given that by HMRC’s own calculation over one million sole traders and landlords are currently eligible for the pilot.
“This may, in part, be explained by the additional record-keeping and software requirements that MTD involves. As HMRC likes to remind people, MTD should ultimately be more efficient, cost-effective and less time consuming for taxpayers than the current system for reporting, but it does require an initial investment of time and money to become MTD-ready. It’s likely that many landlords and sole traders, many of whom saw their income reduced or disrupted during the pandemic, felt that volunteering for the pilot would mean additional expenses and hassle that they could ill-afford, and which could be avoided in the short term.
“From a technical standpoint, there are still a number of unanswered questions about how MTD for income tax will function in practice – such as how the interaction of taxpayers’ other sources of income feeds into a single record within HMRC. This issue has been a sticking point with some of the other new systems that HMRC has introduced in recent years – most recently the 30-day capital gains tax (CGT) reporting system, which caused headaches for many taxpayers and agents where both taxpayer and agent were having to jump through various hoops to ensure the taxpayer is registered on HMRC’s 30-day CGT system. In addition, where CGT repayments arose from the 30-day CGT reporting obligation, the system was not linked to the taxpayer’s self-assessment record. Consequently, the offset of the repayment required a work around generating a lack of confidence and incurring unnecessary time costs. If issues like this can be resolved prior to the roll-out of MTD for income tax, it will ensure a smoother transition.
“At this time of enormous public debt, the government is eager to make headway in closing the UK’s widening tax gap, which at last count was estimated to be £35 billion – attributed to tax avoidance, evasion and non-compliance on the part of taxpayers. The government sees the digitisation of reporting as a vital tool in this struggle, and it will be eager to move to the new income tax system as swiftly as taxpayers can bear. What’s more, the direction of travel is likely to be an ever-greater expectation, even demand, for tax to be paid in real time. We have seen hints of this already with the 30-day deadline to pay CGT when selling a UK residential property, and real-time collection of income tax and NIC for landlords and the self-employed may not be too far away.
“Ultimately, despite the one-year extension, the transition to MTD for income tax is still looming on the horizon, and when it comes to changing tax reporting systems, particularly in relation to business or property income, a little over two years is a relatively tight window for taxpayers to get their affairs in order so as not to be caught out by the new requirements. Landlords and sole traders should take the opportunity as soon as possible to implement diligent digital recordkeeping of their income and expenditure, and if necessary, discuss with a tax advisor, to ensure they have all the tools and practices in place to fully embrace the new scheme and reap the benefits that it promises to deliver.”