Coming soon - making tax digital for income tax self-assessment

HMRC recently updated its guidance on making tax digital (MTD) for income tax self-assessment (ITSA). The latest guidance clarifies some key points, but the April 2024 start date for most affected taxpayers is fast approaching, and lots of practical questions still remain.

Background

MTD is an HMRC initiative designed to ensure more timely and accurate recording of business tax records and submission of tax returns. MTD for VAT was introduced in April 2019, and since April 2022 almost all VAT registered businesses are required to keep digital records and submit VAT returns using HMRC approved software.

MTD for ITSA adopts a similar approach for the income tax affairs of self-employed businesses and landlords, and will require digital records to be maintained using functional compatible software and the regular submission of relevant financial information, but is much wider in its scope than MTD for VAT. In this regard: a low turnover threshold, above which MTD for ITSA will generally be mandatory, means that many more businesses will fall within MTD for ITSA than MTD for VAT; the information that needs to be submitted will be more extensive; and, a requirement to make quarterly submissions will be a new administrative burden for affected taxpayers.

What’s new

New and updated information on what is involved is slowly being released by HMRC, but it is currently spread across various help sheets and webpages that often lack in detail and/or precision. In particular, there is currently a lack of practical guidance, particularly for businesses that do not fall within prescriptive ‘simple’ categories.

What is clear from the information available at present is that business owners will need to rely on HMRC approved (but not endorsed) MTD compatible software, of which there are currently only a limited number of providers (although more options are expected) for the current relatively simple circumstances HMRC’s systems are able to cope with, or rely on an agent that can handle the record-keeping and submission requirements of MTD for ITSA. Affected businesses will need to take steps to ensure their record keeping processes meet both the digital records requirement and the need to make quarterly submissions. There is also then the need to consider how quarterly submissions are integrated and reconciled with full year figures and any necessary tax adjustments made and reported.

Uncertainty

The continuing lack of in-depth guidance from HMRC and relatively limited visible collaboration with key stakeholders, when combined with the proximity of the new regime, has caused concern, leading to hearsay, speculation, and contradictions. Until full clarity is provided by HMRC, it is impossible to be certain how what are major tax reporting changes that are less than 18 months away will operate.

Business owners, especially those who have not experienced MTD for VAT, may want to trial the new system themselves before they are obliged to use it in place of the current income tax reporting regime. Unfortunately, many affected taxpayer groups are currently excluded from HMRC’s MTD for ITSA pilot scheme, most notably individuals with non-business income to report, making it difficult for some to get practical experience of the requirements before they become mandatory.

Next steps

Compulsory quarterly digital reporting is due to apply from April 2024 for landlords and self-employed individuals with total annual qualifying income exceeding £10,000, and from April 2025 for general partnerships without a corporate partner. The commencement date for other affected taxpayer groups is yet to be announced. For the 2024/25 tax year, the £10,000 threshold will be applied to tax return information for the 2022/23 tax year, with a similar two-year delay before MTD for ITSA has to be operated applied to subsequent periods.

Business owners should make sure they make themselves familiar with the guidance provided to date and maintain a watching brief so they are aware of how and when MTD for income tax will affect them and, if so, what steps need to be taken in readiness to meet the record keeping and filing requirements that will soon be placed on them.

For more information, please get in touch with Stephanie Court or your usual RSM contact.