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Delay MTD ITSA to preserve integrity of tax system

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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.  

20th Aug 2021
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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:

  • partnerships
  • 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.     

Replies (117)

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Replying to raju m:
Morph
By kevinringer
25th Aug 2021 11:02

It's already happening, but instead of selling their practices, some sole practitioners are just closing down and writing to their clients saying something along the lines of "I've given up, you're by yourself now".

Thanks (3)
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By tedbuck
25th Aug 2021 14:36

RE-ASSURANCE TO US ALL

I have been very concerned by the number of people who have expressed concern about MTD ITSA so I thought I would write to the Chancellor. He was, of course, too busy to reply personally so passed it to HMRC for them to reply.
I show their reply below - it will I am sure give us all great comfort to understand how concerned HMRC is about how things will work after 2023.
This is the text:-

Dear Sir or Madam

Thank you for your letter of 3 August 2021 to the Chancellor of the Exchequer. This has
been passed to HM Revenue and Customs and I have been asked to reply.

I am sorry to hear you are concerned about Making Tax Digital (MTD) for Income Tax.

In a world where businesses are already banking, paying bills and shopping online, it is
important that the tax system keeps pace. MTD is a modern digital service that will build on
the way many businesses already operate, and help them get their tax right.

MTD makes it easier for businesses to get their tax right by transforming how they keep their
records and send their information to us. For most businesses, MTD for Income Tax will
simply mean keeping digital records, sending us four updates each year, and making any
adjustments in their end of period statement, as they do now in an annual tax return.

Light-touch quarterly updates are not like tax returns. They are simple summaries of income
and expenditure, and can be automatically produced by the software on which a business
keeps its digital records.

Moving to digital ways of working offers businesses considerable productivity advantages. It
makes it easier for them to keep on top of their tax affairs, and means they can see the
health of their finances, close to real time.

COVID-19 has demonstrated the value of our having access to real-time data, and MTD
provides an up-to-date overview of customers’ financial position. Having business data
closer to real-time during the pandemic would have given the government a more accurate
picture of self-employed people’s trading and profit levels, making it easier to target support.

We expect most businesses will be able to operate MTD for Income Tax, but we accept that
not all of them will. Businesses that genuinely cannot use MTD will not have to, and will be
able to apply for an exemption by non-digital means. We will issue details before 2023.
Exemptions have worked well since we introduced MTD for VAT in 2019.

We anticipate that software options will include simple apps designed specifically for sole
traders with no accountancy training, and products tailored to different sectors. There will be
free software available for the smallest businesses with the most straightforward affairs.

For businesses that prefer to keep using spreadsheet-based accounting systems, there will
be ‘bridging’ software available. This extracts information from spreadsheets and submits it
to us in a way that complies with the MTD rules.

We very much value accountants’ views on MTD. We continuously engage with
representative bodies on the design and implementation of the new system, including with
the Institute of Chartered Accountants in England and Wales and the Chartered Institute of
Taxation. These discussions are important steps towards delivering a trusted, modern tax
administration system.

Yours sincerely

Dan Griffin
Policy Correspondence Unit

I think, unless I have misconstrued the letter it could be condensed succinctly into two words - the second word is 'off' - affix the first word according to your own preference.

Of course, I may be over-reacting, maybe he/she is saying that the 'light touch' submissions during the year don't matter so you can invent the information but as HMG are going to be relying on this info for budgeting etc. the plumber's figures really should be accurate. If they are really serious about this I think we should all retire into lock-down and await the inevitable.
HMRC the new Muppet Show!

Thanks (6)
Replying to tedbuck:
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By Jo Nokes
25th Aug 2021 15:10

Gosh, I assume that was a spoof that you wrote, please don’t tell me it’s for real. In actuality, a genuine reply would take 3 months minimum.

Thanks (0)
Replying to Jo Nokes:
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By tedbuck
25th Aug 2021 15:33

The letter is quoted vebatim from what HMRC wrote. A spoof it isn't - would that it was.
They don't care and won't care until it is too late. I think the word is Arrogance!

Thanks (3)
Replying to tedbuck:
Morph
By kevinringer
25th Aug 2021 15:12

tedbuck wrote:

HMRC the new Muppet Show!


How dare you be so slanderous to the Muppets. ;-)
Thanks (1)
Replying to tedbuck:
Morph
By kevinringer
25th Aug 2021 15:15

tedbuck wrote:

For most businesses, MTD for Income Tax will simply mean keeping digital records, ...


And there's the problem: digital records. HMRC thinks it "simple" whereas we know the massive amount of time that is required to digitise the records. If all the records were digitised accurately, the the remainder of MTD would be a doddle.
Thanks (5)
Replying to tedbuck:
Tornado
By Tornado
25th Aug 2021 16:37

Dan Griffin is clearly just quoting a pre-written script, a bit like a telephone sales 'consultant', and we do not know if he really believes this naive rubbish, but he clearly knows very little about the real world of Accounting and Taxation.

Original and reasoned replies would help a great deal more, especially when a good proportion of those that are interested in this matter can see his SIMPLE approach to this on AWEB.

If it is all so simple, then good luck to HMRC because it is they who will have to sort out this mess in the end, particularly Mr Jones who thinks he can claim the full cost of his van against tax and 25% again each year thereafter.

Thanks (5)
Replying to tedbuck:
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By raju m
25th Aug 2021 17:20

Which Planet did the HMRC reply come from?

Do they understand anything about business records and systems?

MTD will make life of accountants and taxpayers ten times harder not easier.

Thanks (3)
Replying to raju m:
Morph
By kevinringer
26th Aug 2021 10:24

raju m wrote:

Which Planet did the HMRC reply come from?

Do they understand anything about business records and systems?

MTD will make life of accountants and taxpayers ten times harder not easier.


I genuinely think HMRC do NOT understand anything about small businesses. And I know why. A few decades ago we had local tax offices. The officers had a lot of taxpayer contact. Unrepresented taxpayers would call at the officers: many on 31 January with bags of records. The officers would carry out investigations: inspecting records and meeting taxpayers. So HMRC officers had a lot of first hand experience of small business records and owners, and knew what records business owners could realistically maintain.

Today there are no local tax officers and there don't appear to be enquiries (I've not had one for 15 years) so HMRC officers no longer have contact with small business owners and their records. This means HMRC are out of touch with their 'customers' and no longer know what their 'customers' can realistically be expected to maintain. HMRC officers use computers all day so assume Joe the Plumber does too and that Joe the Plumber will be just as capable on a computer as HMRC staff are.

I have been saying to HMRC that whenever they conduct a pilot, they need to ensure it includes their full range of 'customers' including (1) the digitally-challenged, (2) the digitally-excluded and (3) those who don't want to engage with HMRC. It is no good HMRC asking for volunteers because no one in the above categories will come forward yet I reckon the above categories make up the majority of HMRC's 'customers'.

Thanks (4)
Replying to tedbuck:
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By bluebaron
25th Aug 2021 17:33

I suppose I shouldn't be surprised by Dan Griffin's reply really. Maybe they will start listening when it all goes spectacularly wrong in a couple of year's time, and millions of taxpayers are failing to comply with the regulations, or filing nonsense. Free software -Is this the same free software that's available for MTD VAT??!!

Thanks (0)
Replying to bluebaron:
Morph
By kevinringer
26th Aug 2021 10:35

Judging by the rubbish that is being filed through MTD VAT, I don't know if HMRC will be worried about nonsense being filed. As long as it is digital nonsense, I reckon HMRC will be quite content. I've not aware of a single MTD VAT client having a VAT check.

Thanks (2)
Replying to bluebaron:
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By Jimess
27th Aug 2021 13:00

Do the people at HMRC communicating with the software houses really believe that the large software providers will care so much about the smaller unrepresented taxpayers to provide free versions of their software? Even if they do it will most likely only be on a "trial basis" and with limited capabilities. I have seen free MTD software but it is all from smaller providers that care about supporting their customers and can see the benefits of building up customer loyalty by offering free software to smaller businesses in the hope that they will eventually upgrade to the full package as they grow. I am also curious how the end of year report will be managed by accountants if the client has already run the four interim quarters on a particular bookkeeping package, given that in MTD for VAT you have to authorise the software you are going to use to submit the MTD for VAT returns with HMRC. Are we also going to have to go through a mass re-authorisation of our self assessment clients when they move on to MTD for ITSA in the same way that re-authorisation had to be done for MTD for VAT? I can see a whole host of practical issues rearing their little heads as this thing rolls out further.

Thanks (3)
Replying to Jimess:
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By BudgetB
29th Aug 2021 08:23

That's actually a very good point. If unrepresented Mr Jones the Plumber signs up for some random app and submits his totally inaccurate quarterly returns, and then at the end of the year decides to approach an accountant to do the final year end one, how is that going to work? Do we have to submit through the same software, do we have to recreate the entire year on whatever software we currently use in house. I hadn't even considered that before, this thing just keeps getting worse!

Thanks (2)
Replying to BudgetB:
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By Jo Nokes
29th Aug 2021 10:23

That’s been puzzling me,too. Clients may be persuaded to do their own bookkeeping, or hire a bookkeeper to do it (I don’t have any desire to do more bookkeeping myself). That gets the basics done. The bookkeeper can file each quarter. That means I won’t have the time pressures every quarter. But how does this link in with the EYO at the year end. I use Taxcalc to file the SATRs, and in fact there is a digital link from VT to the self employed pages. But how do we get from the client’s software to mine? It seems to me that focussing on the bank feeds is a distraction. There are many practical issues that haven’t been addressed at all

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Replying to tedbuck:
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By johnjenkins
26th Aug 2021 09:15

Standard reply. Did you really expect anything different?
Dan Griffin - Policy Correspondence Unit???????????????????????
It is as I suspected. To dampen our complaints HMRC are saying put in the updates what you like we know Accountants will sort it all out. I really hope that all of us and our clients say NO we won't do quarterly updates. We do really need someone of substance to challenge this. i'm not saying we shouldn't go digital, just not the quarterly updates.

Thanks (6)
By Nebs
27th Aug 2021 18:47

Dan Griffin said In a world where businesses are already banking, paying bills and shopping online, it is important that the tax system keeps pace.
I bank online. I also have the option to go to my branch and do everything in there, manually.
I pay bills online. I also have the option of paying by visiting the bank, paying cash, on the phone, lots of ways.
I do shopping online. But I also have the option to visit the shop and do my shopping manually.
It's great to hear that the tax system will follow suit with, presumably, various options to submit returns, online or manual, different each time if I choose. When will you publish the options if I don't fancy MTD one quarter? Or when you said "keep up" was that just, err, shoemakers?

Thanks (2)
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By AndrewV12
01st Sep 2021 10:58

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.

Good points well made.

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