MTD ITSA: What you need to do now
There's recently been a buzz of conversation within the tax community about Making Tax Digital for Income Tax Self Assessment (MTD ITSA). What is going on and what do you need to do now?
Back to the beginning
Starting life as Making Tax Easier in 2015, MTD ITSA has been on the agenda for a long while. It was due to come in before MTD for VAT, but was pulled at the last minute. So where are we now?
A new timeline
The welcome announcement on 23 September of a 12 month delay to the main ITSA start date, resets the clock, but doesn’t; change the direction of travel.
We have more certainty over MTD ITSA, but no firm commitment on basis period reform, except that, if it happens, it will also be delayed 12 months from the original suggested date.
Basis period reform logically, would precede quarterly reporting under MTD ITSA. Otherwise calculating tax bills will be exceedingly complex for many represented taxpayers. An announcement is expected in / by Budget day, but legislation here would be expected in the next Finance Act.
The legislation for MTD ITSA is in place and a revised Statutory Instrument has now been published. There is also information on the HMRC developer Hub service guide.
But even this isn’t the end of the story. There is software to consider. And the ITSA pilot.
Software and the ITSA pilot
At the time of writing, there are just seven software firms listed as having software compatible with MTD ITSA. Many of the software firms used by accounting firms aren’t on the list yet. No doubt the key players will get there in due course. But not for now.
So, for many firms, even apart from the exclusions list - such as businesses who claimed coronavirus support under SEISS or CJRS during 2021/22, those with multiple businesses, those with tax debts - signing clients up right away isn’t an option.
It is still worth looking at the published guidelines for the ITSA pilot, and the information on signing clients up for MTD ITSA. Solutions are changing all the time, and it is likely that it may be possible to sign clients up in advance. But it is unlikely that a bulk sign-up solution will be available.
What to do now
While the detail is still unclear, the direction of travel is pretty much assured.
At some stage soon, unincorporated businesses with trading turnover or property income of over £10,000, subject to minimal exceptions, will need to submit quarterly returns of income and expenses. They will need to keep digital records and seamlessly make submissions without manual intervention. In due course, it is very likely that they will also need to make quarterly payments of income tax.
Are your clients ready? As a very first step, is their record keeping a completely digital journey and how do they intend to make quarterly submissions? Will they need your help?
Basis period reform
The other key question relates to basis period reform. If this goes ahead, having a year end other than 31 March / 5 April will mean additional administration for tax on an ongoing basis. On the revised timetable this would not be before 2024/25.
At the very least, this additional work will involve apportionment of accounts to match the tax year for the annual tax return. This will be necessary even if the end of year return morphs into a ‘crystalisation’ statement under quarterly reporting.
What will this mean for you? Will clients shift to 31 March year ends? What could the impact be for workflow? Contingency planning is what is needed here.
The rules haven’t been set in stone, though change is very likely. 2023/24 is now expected to be a transitional year, when clients with non 31 March / 5 April year ends could be hit with additional tax bills, as ‘tax year basis’ assessment replaces ‘current year basis’ assessment.
The other side of the coin is that overlap relief would disappear on 5 April 2024, so changing a businesses’ accounting date from 6 April 2023 onwards comes without fewer tax complications.
Even if the main basis period reform is delayed, there is a separate consideration of treating 31 March and 5 April as equivalent. In summary, 31 March is looking like a good choice of year end for MTD ITSA and the consequences form workflow management need to be assessed.
Take care what you read
Given the overall level of uncertainty and change, it is important to stress that much of the information on the web is not the final answer. This includes the information on Gov.uk.
The section who can follow the rules for MTD ITSA, still says (at time of writing) ‘you must follow the rules for your next accounting period that starts on or after 6 April 2023, if your taxable turnover from your self-employed business or income from property is above £10,000’. But it is not at all clear, following basis period reform, that this will indeed be so. It is not inconceivable that all businesses will join MTD ITSA at the same time, whatever their accounting date. We await confirmation.
The need for resourcing
ICAS and other professional bodies, recently sent a joint letter to the Financial Secretary to the Treasury outlining concerns about HMRC resourcing, and the impact on businesses and professional firms of the current proposals. This covered the interaction of MTD ITSA and basis period reform. The letter calls for an urgent review of the timetable for change. While we await an answer, it is clear that if reform proceeds on the current timeframe, it will be challenging.
Conclusion
MTD ITSA has been under discussion for a long while and we are entering a period where critical decisions are being made. Greater clarity should come over the next few months, but it is unlikely that every ‘I’ will be dotted and every ‘t’ crossed until much nearer the go live date.
At the moment, it is a case of wait and see, but also a time to make sure that businesses and professional firms assess likely outcomes, and take the basic planning steps to be as ready as possible when change comes.
Raise your concerns with us at tax@icas.com.
