Autumn Statement: Changes to Making Tax Digital for Income Tax Self-Assessment (MTD ITSA)

In December 2022, the government announced a delay in the mandation of Making Tax Digital for Income Tax Self-Assessment (MTD ITSA). This means that MTD ITSA will only apply to self-employed individuals and landlords with income above £50,000 from April 2026. Self-employed individuals and landlords with income over £30,000 will be mandated to comply with MTD ITSA from April 2027. We still don’t know what the plan is for MTD ITSA for partnerships, with an announcement on this expected at a later date.

In his 2023 Autumn Statement, the Chancellor stressed the importance of small businesses to the UK economy. MTD ITSA updates (including the outcome of the small business review for self-employed individuals and landlords with income below £30,000) were contained in the detailed announcements released following his statement. The government will include further details of a penalty regime which will apply to those who volunteer to join MTD ITSA from April 2024 within the Autumn Finance Bill 2023 – this will be published after the Autumn Statement has been debated in Parliament.

What was the outcome of the small business review?

Following the small business review, the Chancellor decided to not extend the requirements of MTD ITSA to self-employed taxpayers and landlords with income below £30,000 at this time. This is a decision that we welcome, and ICAS will continue to represent the views of our members on this topic as part of our engagement with HMRC. The position will however be kept under review, and it’s likely that the government will look at how MTD ITSA is working for self-employed individuals and landlords with income of £50,000 or above before reaching a final decision.

Although we support digital interaction with HMRC, we’re not fully convinced that the benefits of quarterly reporting outweigh the costs of doing this, particularly for the smallest of businesses. So, whilst it is welcome news that the income threshold is not being reduced below £30,000 for the time being, we would have liked to see the Chancellor go further. Earlier this year, we called for the quarterly reporting requirement to only apply to self-employed businesses and landlords with income below the VAT registration threshold (currently £85,000). This would have ensured that the additional burden would largely only fall on unincorporated businesses who are already dealing with MTD for VAT.

The small business review did however take the opportunity to look at some practical changes for MTD ITSA, taking account of feedback provided by ICAS and the other professional bodies.

What practical changes has the government introduced?

Cumulative reporting: The quarterly return process will now be on a cumulative basis. This means that if a MTD ITSA submission early in the tax year contains an error, it should be possible to adjust this on the next quarterly return so that the declaration reflects the cumulative year-to-date figures. Clearly, this is not possible for updates that are not in the same tax year, but it could simplify matters for in-year adjustments that need to be made and potentially reduce the costs of the quarterly reporting requirements.

End of Period Statement: The previous plan was for there to be a mandatory End of Period Statement (EOPS), in effect a form of final declaration to certify the final figures for the year. The government has accepted that this plan has the potential to cause confusion, so this is no longer going to be a formal requirement under MTD ITSA.

Multiple agents: The nature of in-year returns under MTD ITSA means that it’s possible that a taxpayer could have more than one person acting for them. For example, the taxpayer’s accountant may deal with their year-end returns, but they may have a bookkeeper who would be dealing with their quarterly MTD ITSA returns. Authorising multiple agents will be possible, which will be helpful for those unincorporated businesses who need assistance in complying with their tax reporting obligations.

Jointly owned properties: For landlords who own property jointly with another person, they will currently report their share of the income on their tax returns, although there are special rules for people who are married or in a civil partnership. In any case, properties will often be owned in different ways between joint owners, so the logistics of pulling together details for each property return was considered cumbersome. The government has announced that it will be possible to submit income-only returns each quarter, as well as less detailed digital records for joint properties.

Specific exemptions: The government has announced specific exemptions for foster carers and taxpayers without a National Insurance number. The latter could potentially benefit inbound expatriates in some circumstances, including where they remain on the social security system in their home country because of that country’s agreement with the UK.

Non-aligned accounting periods: The implementation of basis period reform in the 2023/24 transitional year is likely to mean that the number of unincorporated businesses which don’t have a year-end which aligns with the tax year will reduce significantly. But there will be some unincorporated businesses, possibly for non-tax reasons, that won’t be able to change to a 5 April or 31 March year-end. HMRC is engaging with software developers to explore computer software options to support those unincorporated businesses with a year-end that isn’t aligned with the tax year with their MTD ITSA obligations.

Minimum standards for software developers: To help ensure that there is a wide market for MTD ITSA software products, HMRC will review its minimum standards for software developers. This change is designed to make it commercially viable for software developers to create innovative software products which will assist taxpayers and their agents with the requirements of MTD ITSA.

What changes were announced in the penalty regime?

The government is introducing what it considers to be a fairer penalty regime for the late filing of tax returns under MTD ITSA.

For the late submission of returns, a penalty point regime will operate in a similar way to VAT penalties, although the mechanics will be slightly different whilst MTD ITSA is not mandatory. Where the taxpayer misses an annual submission deadline, they will incur a penalty point. A penalty of £200 will be charged after two points have been reached. Once MTD ITSA is mandated, the penalty regime will be more strictly applied. Late payment penalties will also apply.