Changes to Making Tax Digital

Delays to the introduction of digital records for income tax self-assessment appear to offer some grace.

What has changed?

The government has set out a significant update to its plans for Making Tax Digital for Income Tax Self-Assessment (MTD for ITSA), postponing the initiative by a year.

The changes were due to apply from April 2023 for unincorporated businesses and landlords with a business or property income over £10,000. However, in August 2021, a number of leading tax and accountancy bodies called on the government to reconsider the timetable, citing the pressure on businesses and their advisers.

What’s the new time frame for MTD for ITSA?

Under the revised rules, from 6 April 2024, anyone registered for income tax self-assessment with a qualifying income of more than £10,000 will have to keep digital records and send quarterly updates about their business income and expenses to HMRC. They will also have to submit an end-of-period statement and final declaration.

Partnerships with individuals as partners will have to follow the rules from April 2025. Limited liability partnerships (LLPs) and partnerships with corporate partners will be required to join, although the date has not been announced. 

HMRC also stated that the new system of penalties for the late filing and late payment of tax announced in March will now come into effect in the tax year beginning in April 2024 for those who must use MTD for ITSA. It will apply in the tax year beginning in April 2025 for all other ITSA taxpayers.

What else has changed?

The Income Tax (Digital Requirements) Regulations 2021 sets out some of the finer details about how MTD for ITSA will work. 

Previously published guidance had said that those affected would have to follow the rules “from their next accounting period starting on or after 6 April 2023”. However, under the new regulations, those mandated to follow MTD for ITSA rules will have a “digital start date” of 6 April 2024, regardless of their accounting period. This means that the new quarterly reporting deadlines will be the same for all, rather than being linked to a business’s accounting period.

How might people be affected?

In light of these details, many self-employed business owners and landlords will not in fact have an extra year to prepare, despite the delay. For example, under the original plans, a sole trader with a year end of 31 March would have had to follow the MTD for ITSA rules from 1 April 2024 (the start of their next accounting period after 6 April 2023). Under the new regulations, their digital start date will be 6th April 2024, so they will effectively have the same amount of time to prepare.

That said, under the original plans, a sole trader with a year end of 5 April would have had to follow the MTD for ITSA rules from 6 April 2023 – but the revised digital start date of 6 April 2024 will give them an extra year to prepare. So a five-day difference in the year-end date could be crucial here.

For more details about the changes, see HMRC’s updated collection of guidance on MTD for ITSA.

What about MTD for VAT?

The changes announced last week do not affect the government’s existing plans to extend the scope of MTD for VAT in 2022. Currently, owners of VAT-registered businesses with VATable sales above the VAT threshold are required to keep digital records and submit VAT returns electronically. As planned, these rules will be extended in April 2022 to include all VAT-registered businesses regardless of turnover.

What does this mean for tax advisers and their clients?

The revised MTD for ITSA regulations, particularly those around quarterly filing, will have a significant impact on practices. For sole traders with 31 March year ends, the MTD for ITSA timeline has effectively not changed. It’s important that practices continue to prepare for the changes.

Practices can sign up eligible businesses and landlords to the MTD for ITSA pilot scheme, which has been running since 2018. HMRC has announced that the pilot scheme will be gradually expanded during the 2022/23 tax year, ready for larger-scale testing in 2023/24

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