MTD and digital links: More of the same
On Tuesday 21 July 2020 Jesse Norman, the Financial Secretary to the Treasury confirmed that Making Tax Digital for Income Tax Self Assessment would become mandatory for many taxpayers in the tax year 2023-24.
When MTD for VAT was originally proposed there were questions asked as to whether HMRC were asking for details of all transactions to be sent to them electronically and many taxpayers were surprised to find that only the nine boxes of form VAT100 were to be sent electronically.
The key difference, however, was that digital links were required to provide an electronic audit trail between the transactions and the nine VAT boxes. The problems caused by the coronavirus have held up making the digital links mandatory. But many people are already using digital links to generate their tax returns.
In many ways the principles of income tax self assessment are the same. Many of the figures on the SA forms are submitted electronically on an annual basis. However, business expenses for self employment and property rental (FHL and other property) will now have to be provided quarterly.
If a tax payer has monthly accounts, the monthly figures can be submitted to HMRC and then those are totalled up into a quarterly submission. The principle of digital links will remain the same – HMRC will want an electronic audit trail to track back from the summary figures in returns to the transactions that underpin them.
There are, however, a larger number of totals being provided to HMRC on the SA100 series of forms and there should be digital audit trails for each of these. The biggest source of this type of information will be from different types of property businesses, and from data on bank account interest received. That interest is reported by bank account rather than just a total for net and gross. Also charitable donations are reported on the basis of totals by charity.
The Construction Industry Scheme will demand a more substantial shift, however. If a subcontracting taxpayer wishes to report a different deducted figure on their tax return to that which has been reported by the contractor(s), then they need to submit detailed figures about the contractors they have worked for, what the payments were, how much tax has been deducted and the relevant materials costs.
Bridging the gaps
In principle it remains possible to use a bridging system from other accounting systems or spreadsheets. However, given the number of submissions that need to be made, bridging is likely to be quite a laborious process. With the new now looming, taxpayers should start considering what alternatives there are.
Taxpayers and their agents need to think carefully about the accounting periods to use. If a taxpayer is also VAT registered, they should aim to ensure the same starting dates are used for submissions both to MTD VAT and MTD ITSA. If the period dates don’t coincide, they will face quite a bit of additional work.
Some agents will take the view that they will avoid doing anything about this until it is mandatory. I would argue that this is a mistake. For an agent it is worth setting up one of their clients to participate in MTD ITSA as soon as is practical. That enables learning all the details of how it work before a lot of additional work needs to be done.