April 2022 sees the final phase of Making Tax Digital (MTD) for VAT, but that’s just the tip of the iceberg. MTD for income tax (MTD ITSA) comes next, and implementation is likely to be altogether more challenging, plus there’s corporation tax to consider. In this article, Nottingham chartered accountants Clayton & Brewill provides a complete guide to MTD ITSA.
MTD requires individuals and businesses to:
- keep and preserve certain specific business records digitally, in what is known as MTD functional compatible software
- file quarterly updates with HMRC via that software
- complete an end of year finalisation process where relevant.
MTD for income tax
In an unexpected announcement earlier this year, the government set out the final details for the MTD ITSA regime with a new timescale for implementation, allowing an extra year for businesses to get ready for the change. The new timetable should also put HMRC’s pilot scheme back on the agenda as a viable option to help businesses prepare in the run-up to mandation.
With the current commercial pressures on businesses, the postponement of a further set of compliance obligations is obviously a welcome development. However, it is only a temporary delay.
The COVID-19 pandemic has given the government more reason than ever to want the accurate, real-time view of business performance that MTD is designed to provide, and businesses must be ready for the new rules when introduced. MTD ITSA comes underpinned by a new penalty regime, and it will therefore be important to get it right from the outset.
Phased implementation: MTD ITSA will be introduced in three stages:
- Sole traders and landlords with qualifying income over £10,000 start first
- General partnerships, that is partnerships that only have individuals as partners (rather than, for example, having corporate partners) start a year later
- Other types of partnerships will enter MTD ITSA at a date in the future yet to be decided.
Go live dates: for sole traders and landlords with qualifying income over £10,000, the start date is 6 April 2024. This is a year later than had been expected. For general partnerships, the start date is 6 April 2025.
Earlier guidance had suggested that businesses would enter MTD ITSA for the first accounting period beginning on or after the start of the tax year in which MTD ITSA was rolled out. This would have staggered entry to the system, depending on the date of the accounting year end, as entry to MTD for VAT was staggered. It would also have meant additional time to prepare for the change.
However, the newly published regulations make it clear that this will not be the case. For each phase of implementation, all businesses required to enter MTD ITSA will enter together at the start of the tax year.
Who is affected?
Those with ‘qualifying income’ over £10,000 will be affected. This is total income from self-employment and property. In a post-pandemic context, where many businesses have made a loss, it’s important to note that the total is before deduction of expenses.
Trusts, estates, trustees of registered pension schemes and non-resident companies are not included in MTD ITSA. There are special provisions for non-UK domiciled individuals, and new businesses will need to join MTD ITSA from April, after the submission of their first self-assessment tax return.
Digital record keeping
MTD requires an end-to-end digital journey. Data flows from each individual business transaction into the quarterly filing to HMRC, with each stage linked digitally without the need for manual input. Filings themselves then pass into HMRC through its application programme interface (API).
Where a combination of software products and spreadsheets are used, digital links are needed between them. There are several ways to do this, including:
- A bespoke software package that keeps digital records and makes your quarterly updates through HMRC’s API
- Spreadsheets that are API enabled, allowing them to access HMRC systems
- Using bridging software. This allows you to use existing accounting software or spreadsheets by bolting on additional software to send data to HMRC through its API.
MTD ITSA may mean you need to make changes to the way records are kept and returns filed with HMRC and to which software products you use. With this in mind, Clayton & Brewill would be pleased to discuss the best way ahead for your business. Please do get in touch to find out how we can help.
Transactions should be recorded as close to the date of the transaction as possible, and before the quarterly filing for that period.
More frequent reporting
MTD ITSA means considerably more annual touchpoints with HMRC. The precise number will depend on income sources and circumstances. For most people, it’s likely to bring six points of contact:
1. Four quarterly updates
These are summaries of business income and expenses. However, precisely what this involves is yet to be specified. It had been understood previously that only a three-line summary would be required for some smaller businesses, and we shall update you as the position becomes clearer. Quarterly updates will be made either to standard quarters:
- 6 April to 5 July
- the 6 July to 5 October
- the 6 October to 5 January
- and 6 January to 5 April
Or, to calendar quarters:
- 1 April to 30 June
- the 1 July to 30 September
- the 1 October to 31 December
- and 1 January to 31 March.
To use calendar quarters, however, you have to apply to HMRC, and there is a deadline for this: the earlier of the time of submission of your first quarterly update, or the date of your first quarterly deadline.
Deadlines for quarterly filing: There is essentially a month to make each quarterly submission. Deadlines are 5 August, 5 November, 5 February and 5 May, and they are the same, regardless of whether you use standard or calendar quarters. Failure to submit by the deadline could mean liability for a late submission penalty.
Tax calculation: HMRC will automatically generate a calculation of how much tax it thinks you owe, based on the information provided in your latest quarterly filing. This however, is likely to need considerable adjustment to constitute a meaningful reflection of liability; we can advise further here.
2. A year end finalisation process to create an end of period statement (EOPS) to finalise trading/property income
The EOPS is based on your accounting period or basis period. It will include the relevant accounting and tax adjustments, such as accruals and prepayments, and claims for capital allowances.
If you have both trading and property income, an EOPS will be needed for each source of income. The deadline for submission of the EOPS is 31 January after the end of the tax year.
3. A final declaration, equivalent to the current self assessment tax return.
This is made after the EOPS. It brings together all sources of income and gains, and makes relevant claims and elections for the tax year. The deadline for submission of the final declaration is 31 January after the end of the tax year.
MTD for VAT: what’s still to come?
All VAT registered businesses, regardless of turnover, enter MTD for VAT from their first VAT return period starting on or after 1 April 2022.
Also, from accounting periods starting on or after 1 April 2022, a new points-based regime applies for penalties and interest. This replaces the VAT default surcharge regime. In addition, a similar regime rolls out for MTD ITSA from April 2024.
MTD for corporation tax
HMRC plans to extend MTD to corporation tax, with a view to the rules applying for companies from April 2026. A point to note is that there is no de minimis exemption for smaller businesses. A pilot is expected in April 2024, allowing practice before the system is mandatory. We shall, of course, keep you updated as further information is published.
Next steps: working together
If you have any concerns, please don’t hesitate to talk to the Clayton & Brewill team about the implications of quarterly reporting under MTD ITSA. It is possible that a change of accounting year end may make sense to streamline reporting deadlines. You should review record keeping and software needs in the light of MTD ITSA, and consider how to handle quarterly filings under MTD ITSA. Clayton & Brewill are happy to act on your behalf if you prefer not to make the updates yourself.
The government is committed to the MTD programme, and we strongly advise making preparations now. Please be assured that we are on hand to advise on the best course in your individual circumstances.