Government publishes revised MTD ITSA regulations
By Chris Campbell, Head of Tax (Tax Practice and Owner Managed Business Taxes)
26 February 2024
Following the consultation before Christmas, we look at what has changed in the revised regulations for Making Tax Digital for Income Tax Self-Assessment (MTD ITSA).
Following the Chancellor’s autumn statement, the Income Tax (Digital Requirements) Regulations 2021 had to be updated to reflect the new timescales for Making Tax Digital for Income Tax Self-Assessment (MTD ITSA) announced in December 2022. This regulatory update also included the decision (as a result of the small business review) for self-employed taxpayers and landlords with income below £30,000 to not be mandated for the time being.
Before Christmas, the government issued a consultation on the draft Income Tax (Digital Requirements)(Amendment) Regulations 2024 and sought feedback from various stakeholders. In our response to the consultation, we flagged that the draft regulations didn’t give sufficient clarity on what constitutes a digital record. We feel that ambiguity makes the regulations open to interpretation and could result in increased compliance costs (in terms of dealing with HMRC queries).
We also noted in the draft regulations that the deadline for quarterly updates was the fifth of the month after the period end. As many of the businesses affected by MTD ITSA are VAT registered, we felt that a deadline for quarterly updates of the seventh of the month after the period end would be better, as this would coincide with the submission deadline for the VAT return for the same period. This consistent approach to deadline dates would likely reduce the administration burden for affected businesses and (where applicable) their agents.
Final updated regulations
Taking account of the feedback from the consultation, the government laid the updated 2024 regulations (due to take effect on 14 March 2024) before Parliament on 22 February 2024. These are amending regulations, so they must be read alongside the 2021 regulations to be clear about how they will impact the self-employed businesses and landlords affected.
HMRC has also issued an update notice to provide more details about what is expected to be included in a quarterly update under MTD ITSA, as well as a tax information and impact note (TIIN) summarising how the changes could affect both businesses and tax receipts. We also expect further update notices from HMRC in the coming months.
Most importantly, the new regulations replace the original £10,000 income threshold (that was due to take effect from April 2024) with the £50,000 income threshold for April 2026 and £30,000 for April 2027. We are also pleased to note that HMRC has taken on board our suggestion to align the deadlines for quarterly updates to the seventh of the month to ensure consistency for VAT registered businesses submitting their VAT return by the same deadline.
In respect of digital records, the new regulations define this as ‘the financial information included in update information, details of the items comprised in that financial information, the amounts of those items and dates on which those items were received or incurred, and such other information as the HMRC commissioners consider relevant’. We look forward to having further discussions with HMRC regarding what this means practically in the coming months.
The new regulations have also clarified some of the wording for the calendar quarter election, which makes it more understandable for self-employed businesses and landlords to submit quarterly updates for calendar quarters instead of quarterly periods ending on the fifth of the month (to align with the tax year).
In other changes since the draft regulations, taxpayers who don’t have a national insurance number won’t have to apply for an exemption because it should automatically apply. This makes sense, as HMRC should already be aware of who doesn’t have a national insurance number.
While cumulative reporting enables a taxpayer (or their agent) to correct an error in their quarterly updates, by doing so in their new return, the new regulations confirm that there will be the opportunity to correct any errors in the final quarterly update in the “final declaration”. This is effectively the incorporation of the income reported under the MTD ITSA quarterly update within the broader self-assessment tax return, which will include other sources of income (such as employment income, interest and dividends) that are not in the scope of MTD ITSA.
What each quarterly update will need to include
The HMRC update notice confirms what each quarterly update will need to include. Self-employed businesses and landlords with income below the VAT registration threshold (currently £85,000) will have the option to submit a total of all income and a total of all expenditure in each quarterly update period. However, they don’t have to choose this, and could instead opt for the option for self-employed businesses and landlords with higher income if they prefer.
Additional details will need to be provided by self-employed businesses and landlords with income above the VAT registration threshold. For trading businesses, income will need to be split between turnover and other business income. Expenditure will need to be split between: Cost of goods bought for resale or goods used; construction industry – payments to subcontractors; wages, salaries, and other staff costs; car, van, and travel expenses; rent, rates, power, and insurance costs; repairs and maintenance of property and equipment; phone, fax, stationery, and other office costs; advertising; business entertainment costs; interest on bank and other loans; bank, credit card and other financial charges; accountancy, legal and other professional fees; other business expenses; consolidated expenses.
Quarterly updates for landlords
For landlords submitting quarterly updates, the income and expenditure will need to be split separately between UK property – non-UK furnished holiday letting (FHL), foreign property (not European Economic Area (EEA) FHL), UK FHL and EEA FHL.
For non-FHL property, the quarterly update will need to include total rent, other income from property, premiums for the grant of a lease and (in the case of UK property) reverse premiums and inducements. Quarterly updates for FHL properties should have a single income line for total amount of rent and any income for services provided to tenants.
In terms of rental expenses for non-FHL properties, the quarterly update will need to include rent, rates, insurance and ground rents; property repairs and maintenance; non-residential property finance costs; residential property finance costs; residential finance costs brought forward; legal, management and other professional fees; costs of services provided, including wages; travel expenses; other allowable property expenses and consolidated expenses.
For FHL properties, the quarterly update will need to include rent, rates, insurance and ground rents; property repairs and maintenance; property finance costs; legal, management and other professional fees; costs of services provided, including wages; travel expenses; other allowable property expenses and consolidated expenses.
Let us know your views
In respect of MTD ITSA, we would be interested to hear how these updated regulations will affect your accounting practice and/or your clients.
More generally, we welcome your views, which help inform our work on consultations or other tax-related matters. ICAS responds to many tax calls for evidence and consultations, as well as producing tax policy papers and reports. We also regularly attend meetings with HMRC at which service levels, delays and other issues are discussed, and we raise problems being encountered by members.
Please email tax@icas.com to share your insights and feedback.
