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ITSA MTD: Recommendations Miss The Point

7th Jun 2023
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The Problem

HMRC has recently undertaken a consultation, receiving recommendations from organisations, about how MTD ITSA should be implemented in the future. It is our opinion, that the main purpose of ITSA MTD has not been considered properly in what we see at least in the editorial commentary of those recommendations that are floating around Accountingweb and elsewhere.

What Was Missing From the Recommendations?

The recommendations and commentary on Accountingweb have failed to address the raison d'etre of MTD ITSA: HMRC wanting to get paid in a more timely fashion, based on in-year data, not payments based on that of a different tax year and often getting paid over a year later than when the profits arose. As it is, if real in-year profits are lower, the taxpayer can reduce their payments on account, but there is no facility to increase them formally (who would?), so HMRC are recovering less tax in a timely fashion. Also HMRC, unlike businesses, cannot forcast effectively their tax-take, as they have no recent data on the  current tax year, as it is happening.

By advising HMRC not to require quarterly submissions, and not providing an alternative to reducing the tax-gap caused by taxes being paid 6 months to 18 months later on average, the recommendations miss the very purpose for which MTD ITSA was created for. Therefore, the recommendations given are likely to be largely ignored by HMRC and an opportunity to shape the future of MTD ITSA has been missed.

 HMRC has the unenviable problem of taxpayers paying their tax bills, in many cases, almost two years after the beginning of the accounting period from when the profits were made; extending unsecured 9 months or more interest-free credit to taxpayers. By the time payment is due, many taxpayers have spent the money, and HMRC never receives it, even after persuing costly insolvency procedures. Reducing the tax-gap on unpaid tax was always the primary objective of ITSA MTD, with the digitalisation of records being a means to an ends of getting that in place.

That is why the tax-year basis is being changed: HMRC is waiting too long to get paid by some businesses. In the current climate of high-interest rates, the value of HMRC’s debtor books are devaluing, whilst it pays interest out on a high Debt/GDP value, which could be reduced if the time to get paid income tax and national insurance suddenly reduces.

What was the main purpose of RTI for payroll in 2011? Was it primarily the computerisation of payroll? No, the computerisation of payroll was a means-to-an-end for getting monthly payments that matched monthly filings on or before the employee was paid. So no longer did HMRC have to wait a year to receive PAYE data, which it could then check against payments made, which were often 9 months late as taxpayers knew HMRC did not have the data to chase them for payment. The same is true for ITSA MTD: the computerisation  of bookkeeping data is for HMRC to make possible in due course the quarterly collection of tax on in-year profits and in the meantime inform taxpayers how much money to put money aside for taxes as they complete their quarterly filings.

We must remember that larger corporate businesses making quarterly installments of corporation tax (based on their estimated in-year profits) were made exempt from MTD for corporation tax some years ago. Its clear the reason is because they were already making quarterly payments on the estimated in-year corporation tax liabilities. This should serve as proof of the real purpose driving MTD ITSA.

The main purpose of ITSA MTD was made formally clear by HMRC at the outset in 2016: that of getting paid quarterly based on in-year profits. HMRC were initially wanting quarterly payments to go along with the quarterly submissions. HMRC later toned down that message, after kickback from various stakeholders at that time. HMRC changed it message to wanting taxpayers to see how their tax was building up during the year, so at least the taxpayer could set aside tax. This is why software vendors have always been required to provide a tax calculation to taxpayers after each quarterly submission, and again at the point of filing an End of Period Statement. The recovery of tax has always been the essential ingredient of ITSA MTD.

In  Conclusion

Going forward, stakeholders who wish to make recommendations to HMRC about ITSA MTD need to consider how HMRC is going to be able to recover taxes much sooner, based on closer real-time information, so that HMRC can better recover taxes due in a timely fashion. If stakeholders do not address this tax-gap, then they are not going to engage effectively with HMRC on the way forward for MTD ITSA.