Making Tax Digital for income tax

21 Dec 2022

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The government’s Making Tax Digital (MTD) programme is intended to move the UK towards a fully digital tax system, which is planned to allow taxpayers to easily keep digital records and report their tax liabilities and payments in real time.

It is the government’s intention that this will reduce taxpayer errors, increase the information available to HM Revenue & Customs (HMRC) and make tax compliance more straightforward for taxpayers.

The initial tranche of MTD, Making Tax Digital for VAT, has already been rolled out, with initial research from HMRC showing that some businesses have seen real benefits from a move to digital record keeping.

Making Tax Digital for income tax (MTD ITSA) has, however, proved more complex to implement. Initially scheduled for rollout in April 2018, mandation has been repeatedly delayed. The latest announcement from the government (December 2022) has further pushed back the start date from April 2024 to April 2026 at the earliest.

MTD ITSA will now be rolled out to taxpayers in stages.

MTD ITSA timetable

  • April 2026: Individuals with business and rental income over £50,000 per annum.
  • April 2027: Individuals with business and rental income over £30,000 per annum.
  • Implementation TBC: Individuals with business and rental income under £30,000.
  • Implementation TBC: Partnerships with only individuals as partners.

The government has said that it will carry out a review of how MTD can be made to work effectively for smaller businesses and landlords (those with turnover under £30,000) and that any rollout to that group will be dependent on the findings of that review and subject to further consultation.

MTD for corporation tax was intended to follow MTD ITSA, with a pilot due to launch in 2024 and possible mandation from 2026. The deferral of MTD ITSA means that this is unlikely to happen as scheduled: companies should assume instead that we will hear more on the plans for corporation tax as MTD ITSA moves towards go-live.

Which businesses will fall within MTD ITSA?

The MTD ITSA legislation will apply to all businesses and landlords within the charge to income tax which have a turnover over the relevant threshold (as set out above), other than:

  • Trusts and deceased estates (although note that this exemption does not apply to bare trusts).
  • Partnerships with any partners which are not individuals (these have only been temporarily excluded from the regime, although no confirmed start date has yet been given).
  • LPs and LLPs (again, this is a temporary exclusion).

Taxpayers who are digitally excluded will also qualify for exemption from the record-keeping and reporting requirements.

It is worth noting that the £30,000 and £50,000 thresholds relate to turnover, not a profit, and that where a taxpayer has more than one relevant source of income (for instance, an individual who has a trade and also a rental property) they are required to add the turnover from each of these sources together to determine whether or not the threshold has been breached.

Where a taxpayer falls into the MTD ITSA regime, they will need to keep digital records and submit quarterly reports to HMRC as well as complete a year-end reconciliation and update process which broadly equates to the current Self Assessment tax return filing.

What are the digital record-keeping requirements?

There is no requirement for all of a business’ underlying paperwork to be scanned and included in their digital records. However, each transaction does need to be recorded digitally, with amounts allocated to the relevant income or expense category (broadly aligned to the current income and expense categories on the Self Assessment tax return). It is the totals from these categories (but not the underlying transactional data) which will then be reported on a quarterly basis.

If you already use some form of accounting software to keep your business records, then you are already on the way to meeting the MTD ITSA requirements. You should, however, check to make sure that you are recording the right information and, as we get closer to mandation, that your software can integrate with the software that your adviser is using for tax purposes.

What are the quarterly reporting requirements?

Taxpayers (or their agents) will have to submit a summary of their income and expenses to HMRC quarterly. There will be no requirement to include accounting or tax adjustments in these quarterly figures, although a business can make these adjustments quarterly if it prefers to do so. Taxpayers will have one month from the end of each quarter to submit their quarterly update.

Significantly, where a taxpayer has more than one trade or property business (or a combination of trading and property income), it will need to keep records and return quarterly information separately for each. Taxpayers accustomed to making this type of adjustment as part of their post-year end processes will have to shift to a much more real-time allocation of their income and expenses.

Following the year-end, the taxpayers will have to submit an end of period statement that will incorporate relevant accounting and tax adjustments, and will finalise the business’ position for the year (again, with separate figures for each trade/property business). Taxpayers will have until the normal Self Assessment deadline (ie 31 January following the tax year) to submit this statement, along with any other income and expenses that would currently be included in their Self Assessment tax return. In practice, therefore, unless a taxpayer chooses to make accounting and tax adjustments quarterly, they may not notice a significant change in their year-end tax compliance process as a result of the changes.

What should you do if you don’t currently use software?

Even though the start date for MTD reporting has been pushed back, there are benefits from getting the right digital records in place now – including making your Self Assessment return more straightforward to complete. You can also benefit from a better understanding of your business finances and cashflow, with some accounting services offering a range of add-on options that can give you the data you need to plan better in areas such as capital expenditure, profit extraction and overall growth.

Whether your software needs to be specifically MTD-compatible will depend on whether you intend to submit any MTD returns (including quarterly returns) yourself. If not, all you are likely to need is a system that will meet the record-keeping requirements and which has the ability to export data that your agent can then submit on your behalf

Smaller businesses (those with turnovers under £30,000) may be questioning whether they need to take action, as they currently have no firm mandation date. If you are in this position we would recommend that you still consider software now, as the wider benefits of having good digital records are still likely to be relevant.

Even smaller landlords – those with just one or two properties – could benefit from using a well-structured spreadsheet to collect their data in (close to) real time. This helps to ensure that taxpayers do not lose track of expenses, and makes putting their tax return together a more efficient process. Saffery Champness can help you decide what is the best solution for your particular business, so that you gain the maximum benefits now and are ready for MTD ITSA when it comes.

Partnerships

When they ultimately fall within MTD ITSA, partnerships will be required to keep digital records, and make quarterly reports in the same way as taxpayers. The end of period statement will, however, be replaced by a ‘Schedule A1 Partnership Return’. This will need to include all partnership income (not just trade or rental income) which falls to be taxed in the relevant year and will also need to show the allocation of income and expenses to the partners. There will be no requirement for the quarterly returns to include an allocation of amounts to individual partners (and partners will not need to make any quarterly reports in respect of their partnership income).

Again, any partnerships not keeping records in a digital format should consider moving sooner rather than later. Well structured records will make completing the partnership tax returns, and giving each partner the relevant information for their own returns, more straightforward.

If you have any questions on MTD ITSA, please get in touch with your usual Saffery Champness contact or speak to Alison Hobbs.

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