ICAEW members frequently ask the Tax Faculty ‘what’s happening with Making Tax Digital for Income tax Self Assessment (MTD ITSA). Is the rollout of MTD still happening in 2023 and if so, what are the detailed requirements?’

The short answers are ‘quite a lot’ and ‘yes it is’. Most of the details, however, are still a work in progress. HMRC recently published Edition 17 of its MTD Update for Agents, explaining how recent developments would increase the functionality available through the agent services account.

But where are we on VAT and income tax?

MTD VAT

MTD VAT is being extended to all businesses voluntarily registered for VAT for their first VAT return period starting on or after 1 April 2022. VAT Notice 700/22 Making Tax Digital for VAT sets out the rules.

Around 100,000 businesses that should already be complying with MTD VAT have still to sign up. HMRC recently sent a further letter chasing these businesses. It knows which aren’t filing using the correct method, but of course it’s rather more difficult to detect breaks in their digital links chain.

The soft landing for digital links within MTD functional compatible software ended in April 2021. This means that where digital records are held in a suite of software and spreadsheets, any data transfer between these products must be digital (ie, no re-keying). It remains to be seen how HMRC will enforce this element of the requirements.

Alongside the new record-keeping and MTD filing requirements for VAT, we also have new late filing and late payment penalty rules waiting to replace the old default surcharge rules. The new penalty rules were legislated by Finance Act 2021. They have been designed so they can be used for all taxes with quarterly, or other periodic, filing requirements, for example income tax and corporation tax.

The new penalties work around filing obligation dates and impose penalty points where a business misses a filing obligation date. Points lead to fines, but good behaviour means points drop away over time. These work in a similar way to points given to drivers caught speeding and will replace the current VAT return late filing penalties once the necessary commencement order has been laid.

MTD ITSA

Unlike MTD VAT, the start date for MTD ITSA is in secondary legislation. A draft of the regulations is available from the developers hub on GOV.UK. Following a consultation published late last year, the start date is almost certainly going to be 6 April 2023 and will apply to unincorporated businesses and landlords with total business or property income above £10,000 per year.

As with MTD VAT, the more detailed requirements will be set out in a Notice and will most likely be based on the draft which was published in 2017. Quarterly reports are likely to require quarterly totals under headings following the self-employed pages of the ITSA tax return.

The first accounting periods to be affected by MTD ITSA will be those beginning on or after 6 April 2023. The first quarterly reports will be those due for businesses using fiscal year accounting, so for the quarter 6 April 2023 to 5 July 2023. As for MTD VAT, these must be derived directly from digital records and filed using API enabled software.

Quarterly reports will be needed for each business a taxpayer has, which includes each property business, and also a rent-a-room business.

Note that the pilot for MTD ITSA is ongoing but remains fairly restricted. It is currently open only to taxpayers who are:

• UK resident
• registered for self assessment with all returns and payments up to date
• a sole trader with income from one business only or a landlord who rents out UK property (or both).

You cannot sign up if you need to report income from any other source.

The criteria for a taxpayer to join the MTD ITSA pilot can be found on gov.uk and for further information see our recent news item Latest on Making Tax Digital for Agents.

Agents should be aware that some clients who are not eligible to join the public beta may be able to join in private beta by contacting their software provider.

One of the areas of uncertainty is how taxpayers will report income other than from trading and property; HMRC’s expectation is that most MTD software will allow non-MTD income to be reported but it is also building a new service to allow non-MTD income to reported separately. In due course, this new service will replace the current self assessment system which will be decommissioned.

Agents who want to get ahead can start moving clients onto digital records – particularly if their software provider confirms they will be providing an MTD ITSA product.

To find out more, join the Tax Faculty’s webinar, MTD ITSA – back to basics and myth-busting that will take place on 14 September 2021 from 12:00-13:30. Book your place now.