The long-awaited Income Tax (Digital Requirements) Regulations 2021 (SI 2021/1076) have now been published, alongside the announcement of a year’s postponement to the implementation of Making Tax Digital for Income Tax (MTD ITSA). We examine the practical implications of this here.
New timescale for MTD ITSA
Making Tax Digital for Income Tax now begins in three steps, as follows:
• 6 April 2024 for sole traders and landlords with gross turnover above £10,000 whose business existed immediately before 6 April 2023, regardless of their accounting year end;
• 6 April 2025 for general partnerships (those with only individuals as partners); and
• an unspecified date for other partnerships (for example, those with corporate partners, LLPs).
Note that new businesses join at the start of the tax year following the 31 January filing date for their first self-assessment tax return.
Also new is the so-called ‘big bang’ start. This is a change from earlier guidance, which envisaged businesses starting from their first accounting period beginning on or after the proposed implementation date.
New timescale: basis period reform proposals
We now have confirmation that any change to basis period reform will also be pushed back (see https://questions-statements.parliament.uk/written-statements/ detail/2021-09-23/hcws308). A further statement is anticipated in the Budget. However, the transition year will not be earlier than the 2023/24 tax year, and any proposed changes will not take effect before 2024/25. Without such reform, the relationship between tax bills based on the end of period statement (EOPS, see below) and quarterly updates under ITSA will be complex for many clients.
Making Tax Digital for Income Tax applies where total gross turnover/income (whether from business or property, or a mixture of both) is over £10,000.
Non-resident companies, trusts, estates, trustees of registered pension schemes and non-resident companies are exempt from MTD ITSA. So are the foreign businesses of non-UK domiciled individuals.
As with MTD for VAT, application can be made for exemption on religious grounds or for digital exclusion, but the exemption here is tightly drawn.
• to keep accounting records digitally, recording transactions as near to real time as possible, and by law, before the quarterly filing for that period − details required will be the amount of the transaction, the date (per the accounting method used) and transaction category;
• submit quarterly returns of income and expenditure, using standard quarters; and
• make an end of period statement (EOPS).
Note, however, that the EOPS relates to the normal accounting basis period, rather than the quarterly return periods. The EOPS is in essence the tax return page for trading/property income, and is due according to the normal self-assessment 31 January deadline. A final declaration (see below), not covered by the regulations, replicates the current self-assessment tax return.
Payment of tax continues to follow the usual timetable without change for the foreseeable future. But given the recent consultation on timely payment of tax, it would be naïve not to expect a move towards real-time payment in the medium term.
Filing is required for each trading or property business, meaning some clients will have multiple submissions to make.
Submissions are to pre-set quarters. By default, these are: • to 5 July (deadline 5 August);
• to 5 October (deadline 5 November);
• to 5 January (deadline 5 February); and
• to 5 April (deadline 5 May).
Clients can, however, elect to use calendar quarters, reporting to 30 June, 30 September, 31 December and 31 March instead. The deadlines are the same whether standard or calendar quarters are used.
To use calendar quarters, application is made by the earlier of submission of the first quarterly filing, or date of the first quarterly deadline. The use of calendar quarters is a sort of jury-rig solution to the problem of aligning quarterly updates with accounting periods and tax years. It means that on joining MTD ITSA, calendar quarter businesses make a first report covering 6 April to 30 June. On revoking a calendar quarter election, 5 days are added back, with the final quarter running from 1 January to 5 April. The calendar quarter election applies for quarterly updates but does not change underlying basis periods for self assessment. Unless basis periods are reformed, this will lead to anomalies.
It is understood that there will be no declaration or accuracy ‘requirement’ with the quarterly submissions.
End of year procedures
As matters stand, there is dissonance between MTD ITSA and the current self-assessment system. This makes the end-of-year procedure a game of two halves. The MTD ITSA Regulations provide for the EOPS, but there is also a final declaration that ‘replaces’ the self-assessment tax return, and does not form part of the MTD ITSA Regulations.
The EOPS is based on the accounting or basis period, ‘decoupled’ from the quarterly filings. It contains the accounting and tax adjustments needed to finalise the tax assessment for the year, with a deadline of 31 January after the end of the tax year. Where someone has more than one trade, or trading plus property income, an EOPS will be due for each one.
The final declaration is made in addition to the EOPS. It is filed to the usual self-assessment tax return deadline, and provides the facility to make the claims and elections usually made in the return. It is used to report non-MTD sources of income and finalise the tax liability.
Ongoing tax calculation
Making Tax Digital for Income Tax is predicated on HMRC responding to each quarterly filing with an estimation of tax liability. But where businesses don’t use a 31 March or 5 April year end, it is hard to see how this will be meaningful.
Knowns and unknowns
The regulations provide important new detail. But there are also significant areas that are not covered. Still awaited are:
• the detail of what the software must be able to do in order to qualify as MTD functional compatible software: this should be set out in a Software Notice in due course;
• a Retail Sales Notice setting out special record keeping provisions for retailers: a draft was published with the Finance Act 2017;
• further detail on quarterly filings, expected in an Update Notice: earlier guidance suggested a three-line summary might be an option; and
• an End of Period Notice specifying the information to be provided in the EOPS.
To announce a delay at the same time as publishing regulations may look like mixed messaging. But there is far too much at stake to envisage MTD ITSA being put off indefinitely.
Making Tax Digital for Income Tax in its latest iteration is particularly challenging. The real game changer is the requirement for clients to report to standard quarters, something absent from earlier guidance. All in all, there is now considerable argument in favour of change to accounting year ends at least to match standard quarters, if not to 31 March, to accommodate the change to the new system, whether or not the proposed basis period reform takes place.
Making Tax Digital for Income Tax goes far beyond persuading a minority of clients into digital record keeping. It will demand new ways of working, and fundamental rethinks for transactional recording. Assuming that change is inevitable, it needs to be made to work as smoothly and productively as possible for clients.