Regulations published

Making Tax Digital for Income Tax Self-Assessment (MTD ITSA) was initially pencilled in for the 2023/24 year. However, the recently published Income Tax (Digital Requirements) Regulations 2021 have moved this timetable back twelve months to April 2024. Additionally, partnerships will get an extra twelve months, and will be mandated from 2025. In summary, the start dates will now be as follows:

• 6 April 2024 - sole traders and landlords with combined turnover/gross rental income over £10,000
• 6 April 2025 - general partnerships
• unspecified date after 6 April 2025 - other partnerships.

General partnerships are partnerships that are, e.g., not LLPs and have only individuals as partners. Trusts, estates, trustees of registered pension schemes and non-resident companies are not within the scope of MTD ITSA.

While the change in date is obviously welcome, the additional time is not just kicking the can down the road. The regulations contain details of a change which make it imperative that the time is actually used to prepare.

Blanket mandating

Originally, affected businesses were to be mandated into MTD ITSA from the first accounting period that began on or after the start date, which was then 6 April 2023. The regulations now state that every business will be mandated in from 6 April 2024, and will report to the same deadlines. For businesses with a year end date that falls early in the tax year, e.g. 30 April, the delay won’t actually give them much extra time.

Qualifying income threshold

The £10,000 qualifying income threshold represents total income from self-employment and property before deduction of expenses. It’s total income, so individuals combining rental and self-employment income streams add these together. Individuals receiving income from a jointly owned property only look at their share. Those who are sole traders and involved in a partnership don’t count their partnership income to establish if they need to join MTD ITSA in 2024. There are special rules for those who aren’t UK domiciled.

For existing businesses, the £10,000 check is for the tax year 2022/23 with a start date of 6 April 2024.

Quarterly reporting

The regulations also contain details of a game changing deviation from the original guidance. All affected businesses will now need to make their quarterly digital updates to common deadlines. By default, these will be the quarters to:

• 5 July
• 5 October
• 5 January
• 5 April.

It will be possible to make an election to file on a calendar basis instead. If businesses do this, the deadlines will be 30 June, 30 September, 31 December and 31 March.

If a business wants to use calendar quarters, the deadline to apply is the earlier of the time of submission of the first quarterly filing, or date of the first quarterly deadline. Note that in the first tax year of joining calendar quarter reporting, the first quarter runs from 6 April to 30 June, not 1 April to 30 June. Elections cover a complete tax year.

Quarterly filings have to be made within one month of the end of the standard quarters. Calendar quarters have the same deadline, gaining an extra five days’ grace.

What needs reporting?

Quarterly. The detail required for quarterly filing isn’t yet confirmed. Earlier guidance suggested it might be a three-line summary for some businesses. What HMRC does say is that record keeping should be done as close to the transaction date as possible, and by law, must be before the quarterly submission for that period is made.

Annually. We now know that the year-end finalisation is a two-part process. First, an end of period statement (EOPS) is made. This is based on the accounting or basis period, and detail is on HMRC’s developer hub. It’s decoupled from the quarterly submissions. It includes the accounting and tax adjustments to finalise the tax assessment for the year. The EOPS has to be submitted by 31 January after the end of the tax year.

Individuals with multiple trades or both trading and property income are expected to file an EOPS for each source.

There’s also a final declaration. It’s designed to replace the self-assessment tax return (SATR). Once individuals have submitted the EOPS, the final declaration is used to make claims, elections etc, and is filed to the usual SATR deadline. It is currently unclear how quarterly updates will align with EOPS and final declarations for businesses who don’t have a standard quarter end as their accounting year end.

Getting ready

Those not already keeping digital records need to make that transition, and those keeping digital records need to check their products will comply. There may be a need to consider a change of accounting year end to facilitate reporting to standard quarters. This is a new dimension to MTD ITSA that no one had anticipated and is going to need a major rethink for some.

MTD ITSA is about a whole new way of working. Individuals are going to have ongoing contact with HMRC throughout the year, not an annual check-in, based on the 31 January SATR deadline. It’s four quarterly filings to strict deadlines, backed up by a new penalty regime. There’s no room for slack. We are moving towards a system where transactions are tax adjusted at point of data entry, wherever possible. As compliance moves towards a single point of truth model, large scale, end of year revisions to quarterly filings or significant differences between the EOPS and quarterly submissions may prompt HMRC questions.

There will need to be robust reconciliations between conflicting data submissions to avoid costly enquiries. To leverage potential advantages of the new system, such as a better real-time business information and estimates of tax liabilities, businesses will need to get transactional reporting right.