ICAS calls for new approach to MTD ITSA quarterly reporting
By Chris Campbell, Head of Tax (Tax Practice and Owner Managed Business Taxes)
29 June 2023
ICAS has called for HMRC to adopt a new approach to making tax digital for income tax self assessment (MTD ITSA).
Before Christmas, ICAS welcomed the announcement of the two year delay in the mandation of MTD ITSA. Following that announcement, MTD ITSA will now be mandatory from April 2026 for businesses, self-employed individuals and landlords with income over £50,000. Self-employed businesses and landlords with income over £30,000 will be required to comply with MTD ITSA from April 2027, with partnerships to follow at a later date.
At the same time, the government announced a review into smaller self-employed businesses and landlords with income of under £30,000. Having received feedback from our members, we have had very positive dialogue with HMRC over the last few months as part of this review and we look forward to hearing the recommendations in the coming months.
Time for a fresh approach to quarterly reporting requirements
ICAS believes that the review into smaller self-employed businesses and landlords is the ideal timing to consider a fresh approach to the quarterly reporting requirements of MTD ITSA, not just for unincorporated businesses with income of under £30,000 but for businesses with income below the VAT registration threshold (currently £85,000).
In the ICAS MTD strategy, we make clear our support for the concept of MTD and retaining digital accounting records, which has the potential for achieving a more efficient and resilient tax system in the longer term. Our tax policy positions also recognise the significance of the MTD initiative as one with potential for streamlining the interface between taxpayer and taxing authority, whilst urging caution in the pace and manner of its introduction, particularly for smaller businesses below the VAT registration threshold.
Following meetings with HMRC and HM Treasury officials, ICAS has written to Kevin Hollinrake MP, Minister for Enterprise, Markets and Small Business at the Department for Business and Trade to highlight the additional cost burden for smaller businesses being required to submit returns under MTD ITSA on a quarterly basis.
At our recent digital practice conference, we explored the benefits for accounting firms to be fully digital and MTD is an important part of this. But given it’s estimated that only around 5% of accountancy firms in the UK are truly digital, it’s clear that the quarterly reporting requirements of MTD ITSA will create a disproportionate cost burden for smaller businesses.
Many self-employed taxpayers may operate several micro unincorporated businesses, particularly so in rural areas. We have received member feedback that those taxpayers may find the cost burden even more significant, but this will depend on the nature of their business operations and their software provider. Any free software that may be offered by HMRC may not necessarily address these challenges, but we will continue to have dialogue with HMRC on this as part of our ongoing relationship with HMRC as an external stakeholder.
We recognise that quarterly tax reporting requirements may be most easily met for many businesses by using cash-based accounting, even if they do not formally adopt the special cash accounting rules for income tax available for unincorporated businesses and landlords with turnover of £150,000 or less. However, it’s likely that all but the smallest businesses will need accruals-based accounts to adequately assess profitability for business management purposes and to ensure long-term survival. Quarterly reporting using accruals accounting is unlikely to be feasible or cost effective for the majority of SME business. For businesses who do not use the special cash accounting for income tax rules, additional tax adjustments are likely to be required at least annually. Some entities may have specific reporting obligations for accounting purposes. The result is that many entities will require more than one set of figures: One for quarterly tax compliance and another for business management and year-end reporting. Some businesses may even use a different reporting basis under MTD for different taxes, for example cash accounting for VAT, but accruals accounting for income tax.
While smaller unincorporated businesses may find the quarterly reporting requirement more onerous, unincorporated businesses trading above the VAT registration threshold (currently £85,000) are more likely to have the relevant digital accounting systems in place and will already be required to submit their VAT returns under VAT (typically on a quarterly basis) unless they are exempt. For this reason, ICAS is only calling for an exemption for the quarterly reporting requirement for businesses with income below the VAT registration threshold. Where a business is exempt from MTD for VAT, they should automatically be exempt from MTD ITSA.
Let us know your views
We welcome members’ input to inform our work on consultations or other tax-related matters – email us to share your insights and feedback. 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.
