Delay MTD ITSA to preserve integrity of tax systemby
Leading tax and accountancy bodies called on HM Treasury to delay the mandation of MTD ITSA, and the switch to the tax year basis, both of which are due to take effect on 6 April 2023.
Five professional accountancy and tax bodies (ICAEW, CIOT, ATT, ICAS and LITRG) have written to Jess Norman MP, financial secretary to the Treasury, asking the government to reconsider the timetable for the change in basis periods to the tax year basis, and the mandation of MTD ITSA, both of which are due to come into effect in April 2023.
The public letter is not just accountants whinging that they won’t have enough time to educate clients about the changes (although this is true), the professional bodies are concerned that the current timetable will put the integrity of the tax system at risk.
The areas of strain on the tax system and the accountancy profession outlined in the letter from the professional bodies include:
MTD for VAT
Although 1.3m businesses were required to start submitting their VAT returns using MTD software from April 2019 (some were deferred to October 2019), only 1.16m are currently signed up to MTD for VAT.
It is a credit to the accountancy profession that this transition has gone so smoothly, HMRC research on the impact of MTD for VAT has shown that 754,000 businesses took advice from their accountant about MTD. Also, 41% of self-employed individuals have increased their use of tax agents since the introduction of MTD.
The HMRC helpline was put under considerable strain by the introduction of MTD for VAT with average waiting time for a call to be answered doubling from 5 mins 21 secs in March 2019 to 10 mins 48 secs in May 2019.
Around 750,000 businesses that registered for VAT on a voluntary basis will be required to enter the MTD for VAT regime from April 2022. Some 350,000 businesses that are voluntarily registered are already submitting VAT returns under MTD.
Further pressure will be put on the remaining 140,000 businesses that were mandated to join in 2019, but have not done so. This means that nearly 580,000 businesses will require advice from accountants on MTD for VAT before April 2022.
New penalties for VAT
April 2022 will see the introduction of a completely new penalty system for late filing and late payment of VAT. This will affect 2.5m businesses, but there has been very little HMRC education about this change.
The new penalties will be based on the number of points a business gathers for non-submission of returns, but each tax will have its own system of points. The business (or tax agent) will have to keep track of multiple points racking up for different tax returns.
Tax year basis
The tax year 2022/23 is the proposed transition year to the switch to the tax year basis from April 2023. As I highlighted in July this change in basis periods will mean that one-third of partnerships and 7% of sole traders will be assessed on more than 12 months of profit in 2022/23, increasing their tax bills unexpectedly when many businesses are struggling to recover from the pandemic.
In total, around 360,000 businesses will be affected by the transition to the tax year basis, all of which will need detailed advice from their accountants.
In addition, where more than 12 months of income is assessed in 2022/23 this will have a knock-on effect for income-related charges and deductions, so special rules will have to be written to provide adjustments in all these areas:
- student loan repayments
- national insurance contributions
- high-income child benefit charge
- capital allowances
- pension allowances
- relief for losses
- cash basis limits
- averaging of profits for farmers and creative artists
- working and child tax credits
- tax payments on account.
Is there time to write new rules for all of these areas before the beginning of the transition year on 6 April 2022?
MTD ITSA mandation
As I revealed early this month the change in basis periods will mean a big bang start to MTD ITSA on 6 April 2023, when around 4.3m individuals and businesses will be required to start filing quarterly MTD submissions and to keep digital records. Of these businesses it is expected that 2.8m will require advice from accountants before they start submitting under MTD ITSA.
There has been a very limited MTD ITSA pilot running, which was supposed to be expanded by now to cover the “vast majority of sole traders and landlords”. However, as of August 2021 all of the following are still excluded from the MTD ITSA pilot:
- individuals with more than one trade/ profession
- UK landlords letting property overseas
- non-resident landlords letting UK property
- anyone who has taxable income from sources other than their trade/profession.
There are currently only seven providers of software suitable for use in the MTD ITSA pilot.
New penalties for ITSA
The same “points means penalties” system that comes into effect for VAT from April 2022 will apply to submissions filed under MTD ITSA from April 2023.
HMRC confirmed there will be no soft landing for this new penalty system although it will be completely novel for taxpayers and accountants to get to grips with.
What will happen?
There is no guarantee that Treasury ministers will listen to these sensible objections by the professional accountancy and tax bodies, but if they don’t, a period of chaos and disorder in the tax system will certainly be the result.