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How MTD ITSA and self assessment interact

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How is MTD ITSA reporting going to overlap or replace the filing of self assessment tax returns? Rebecca Cave has some answers, but it’s not going to be simple.

1st Oct 2021
Tax Writer Taxwriter Ltd
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The Income tax (Digital Requirements) Regulations 2021 (SI 2021/1076) for MTD ITSA were passed by Parliament on 23 September, to coincide with the announcement of the delay to the start of MTD ITSA until April 2024.

These new regulations are quite different to the previous draft MTD regulations released on the developer hub, which software producers had been working to.  

Big bang is coming

All sole-traders and individual landlords who are in business on 5 April 2023 will have to comply with the MTD regulations from 6 April 2024, if their gross turnover (trading and property income) exceeds the MTD entry threshold of £10,000. This ‘digital start date’ applies to all of those taxpayers, irrespective of the accounting period end the business uses.

Partnerships are not mentioned in the regulations at all, so a new set of MTD regs will have to be passed to deal with general partnerships which have a proposed digital start date for MTD ITSA of 6 April 2025.

Quarterly updates

All taxpayers within MTD ITSA will have to submit quarterly updates for the same standard quarters to 5 July, 5 October, 5 January and 5 April, with the reporting deadline exactly one month later.

However, a taxpayer can elect to report their quarterly updates for calendar quarters to 30 June, 30 September, 31 December, and 31 March, but the reporting deadlines will remain the same as 5 August, 5 November, 5 February and 5 May.

The regulations appear to be slightly flawed in this regard as they say the first quarterly update period, even where a calendar quarter election has been made, must start on 6 April not 1 April and run to 30 June.

End of period statements

The End of Period Statement (EOPS) is not tied to the quarterly statements at all, but instead will comprise the annual accounts figures in a similar fashion as is currently reported on the self assessment pages (SA103) and property pages (SA105) of the self assessment tax return.

The requirement to submit an EOPS is also not connected to the requirement to submit quarterly updates. A taxpayer must submit their first EOPS for the first accounting period that starts after their digital start date, and this will not necessarily align with the periods for which they must submit quarterly updates (see examples below).

This is a new development and will mean there could long overlap between MTD and SA tax returns, when certain taxpayers have to submit both an SA tax return and quarterly updates under MTD, but not an EOPS.

Where required to be submitted, the EOPS will replace the relevant pages on the SA tax return. But if the taxpayer has other income or charges, eg interest or HICBC, these will have to be reported through the new year-end finalisation service (replacement for SA return) by the same deadline.

For the first few years, until an EOPS is required, the accounting information will be reported on the SA tax return instead.

Example 1: Tim aligns with tax year

Tim is a financial consultant who makes up his accounts to the tax year end: 5 April.

Tim’s digital start date for MTD ITSA is 6 April 2024. Tim will submit his first quarterly updates, SA tax returns and EOPS on this timetable:  

MTD Qrt/ SA return: Income and expenses in period: Deadline for submission:
Y1 Q1 6 April 2024 – 5 July 2024  5 August 2024
Y1 Q2 6 July 2024 – 5 October 2024  5 November 2024
SA 2023/24 Year to 5 April 2024  31 January 2025
Y1 Q3 6 October 2024 – 5 January 2024  5 February 2025
Y1 Q4 6 January 2025 – 5 April 2025  5 May 2025
Y2 Q1 6 April 2025 – 5 July 2025  5 August 2025
Y2 Q2 6 July 2025 – 5 October 2025  5 November 2025
EOPS no.1 Year to 5 April 2025  31 January 2026

Example 2: Sandra has 31 March year end

Sandra is a shopkeeper who makes up her accounts to 31 March. Her first EOPS must be submitted for her first accounting period that starts on or after her digital start date of 6 April 2024, ie the accounting period: 1 April 2025 to 31 March 2026.

Sandra elects to use calendar quarters for her quarterly updates. Sandra will be required to submit quarterly updates, EOPS and SA returns as follows:

Qrt/ SA return: Income and expenses in period: Deadline for submission:
Y1 Q1 6 April 2024 – 30 June 2024  5 August 2024
Y1 Q2 1 July 2024 – 30 September 2024  5 November 2024
SA 2023/24 Year to 31 March 2024  31 January 2025
Y1 Q3 1 October 2024 – 31 December 2024  5 February 2025
Y1 Q4 1 January 2025 -31 March 2025  5 May 2025
Y2 Q1 1 April 2025 – 30 June 2025  5 August 2025
Y2 Q2 1 July 2025 – 30 September 2025  5 November 2025
SA 2024/25 Year to 31 March 2025  31 January 2026
Y2 Q3 1 October 2025 – 31 December 2025  5 February 2026
Y2 Q4 1 January 2026 -31 March 2026  5 May 2026
Y3 Q1 1 April 2026 – 30 June 2026  5 August 2026
Y3 Q2 1 July 2026 – 30 September 2026  5 November 2026
EOPS no.1 Year to 31 March 2026  31 January 2027

Example 3: Giles 30 September accounts

Giles has always drawn up the accounts for his farming business to 30 September. His digital start date for MTD ITSA is 6 April 2024. The first accounting period for which Giles has to submit an EOPS is: 1 October 2024 to 30 September 2025.

Giles makes a calendar quarters election. He will be required to submit quarterly updates, SA returns and EOPS as follows:

Qrt/ SA return: Income and expenses in period: Deadline for submission:
Y1 Q1 6 April 2024 – 30 June 2024  5 August 2024
Y1 Q2 1 July 2024 – 30 September 2024  5 November 2024
SA 2023/24 Year to 30 September 2023  31 January 2025
Y1 Q3 1 October 2024 – 31 December 2024  5 February 2025
Y1 Q4 1 January 2025 -31 March 2025  5 May 2025
Y2 Q1 1 April 2025 – 30 June 2025  5 August 2025
Y2 Q2 1 July 2025 – 30 September 2025  5 November 2025
SA 2024/25 Year to 30 September 2024  31 January 2026
Y2 Q3 1 October 2025 – 31 December 2025  5 February 2026
Y2 Q4 1 January 2026 -31 March 2026  5 May 2026
Y3 Q1 1 April 2026 – 30 June 2026  5 August 2026
Y3 Q2 1 July 2026 – 30 September 2026  5 November 2026
EOPS no.1  Year to 30 September 2025  31 January 2027

Conclusion

The MTD ITSA regulations are quite brief and further details on the practicalities of MTD ITSA are expected to be set out in an HMRC guidance note, yet to be published.

What is clear is that MTD ITSA will create a lot of work for accountants and businesses, some of which will be duplicated by the effort required to submit SA tax returns for a considerable overlap period.

Good luck explaining all that to your clients and billing them for your trouble.

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Replies (70)

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Replying to Tornado:
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By johnjenkins
05th Oct 2021 14:52

What makes it even worse for me is that I was in on SA right from the start. Although there were a few problems the concept of everything under one return was right and it works. Mandatory use of digital bookkeeping and accounts is not a good concept. MTD is not a concept it is an ideal and we all know where they end up. It's an IT concept that should not under any circumstances be mandatory.
Let's look at the life of a business. As it grows so does it's administration and eventually it will naturally go digital. The lack of MTD will not in any way affect the collection of tax. This HMRC will find to their own detriment.

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By Graham Greenwood
05th Oct 2021 16:19

Thanks, Rebecca, for another excellent article.
To anyone who is unsure as to the reasons HMRC are implementing MTD ITSA I can tell you the I spoke with one of their representatives at a recent Accountex event in Manchester. Verna Gellvear, part of the Customer Readiness and External Stakeholder Team, stated HMRC's reasons for introducing MTD ITSA were twofold; (1) to be able to present more up-to-date figures to HM Treasury of how much tax they hope to receive, and (2) to reduce the tax gap.
I make no comment on either reason, merely pass them on for your readers' enlightenment.

Thanks (0)
Replying to Graham Greenwood:
Tornado
By Tornado
05th Oct 2021 16:32

I would have thought that is was obvious to everyone that the way HMRC are approaching this will not achieve either of these two aims.

In fact, the prospect of H M Treasury being provided with figures based on the current MTD proposals is quite alarming and could cause a great deal of harm to this country if adopted.

Thanks (3)
Replying to Graham Greenwood:
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By johnjenkins
05th Oct 2021 16:36

Yep that's the standard hogwash HMRC dish out. It's impossible to give the treasury more up to date figures about tax liability as this is still based on the yearly computations and not quarterly updates.
"Tax Gap" reduction?
All reasons HMRC have given for MTD have been proven to be not true. I would think even the staff at HMRC feel stupid giving out this standard c'p.

Thanks (0)
Replying to Graham Greenwood:
Morph
By kevinringer
05th Oct 2021 16:39

Thanks Graham. Regarding explanation (2), we now know that the tax gap has increased under MTD VAT so HMRC has lost their argument about closing the tax gap. Regarding (1) I make the following comments:

1. Income tax is an annual tax. Whilst most rental businesses have a reasonably consistent level of income and expenses from quarter to quarter, the self-employed do not. This means the information in Q1, Q2 and Q3 is meaningless until the final figures for the whole 12 months are known. I act for a lot of farmers for whom income Q1, Q2 and Q3 generally generate income whilst Q4 (winter) generate losses. If HMRC starts planning based on incomplete information they are going to end up finding their forecasts are even more off-target than they are with SA.
2. If Treasury wants more up to date figures and feels quarterly is more up to date than annually. What happens when (if?) MTD ITSA has been around for a few years and Treasury decide they now need more up to date information than quarterly? Will MTD then become monthly? Where will it stop?
3. I thought the Government made annual spending commitments. If Treasury was able to achieve its goal of accurate quarterly tax forecasts, would that mean we should expect the Government to hold a Budget every quarter?
4. Looking at the amount of tax generated in the UK, Corporation Tax only generates about a quarter of the tax that Income Tax generates. Yet companies make far larger profits than individuals. Given that the self-employed don't have huge profits to hide and don't have the resources to conceal them, shouldn't HMRC focus MTD on CT first because from a layman's point of view, that's where the tax gap appears to be.

Thanks (4)
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By Agutter Accounts
06th Oct 2021 11:53

Unless a client does quarterly VAT returns that coincide with the reporting quarters all MTD for ITSA will do is put yet another administrative burden on hard-pressed sole traders which detracts from them doing the day job - actually generating income so they pay tax at all.

The proposed threshold for the requirement to file is ridiculously low and I can foresee nothing but problems with clients who find filing once a year something of a low priority and a chore.

But then, whenever did government ever do anything other than pay lip service to supporting teh needs of small businesses.

Thanks (0)
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By Agutter Accounts
06th Oct 2021 11:53

Unless a client does quarterly VAT returns that coincide with the reporting quarters all MTD for ITSA will do is put yet another administrative burden on hard-pressed sole traders which detracts from them doing the day job - actually generating income so they pay tax at all.

The proposed threshold for the requirement to file is ridiculously low and I can foresee nothing but problems with clients who find filing once a year something of a low priority and a chore.

But then, whenever did government ever do anything other than pay lip service to supporting the needs of small businesses.

Thanks (0)
Replying to Agutter Accounts:
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By johnjenkins
06th Oct 2021 12:37

Totally agree. Oh by the way have you got hiccups?

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By Barry Adams
09th Oct 2021 10:01

Are the dates correct for the second example, Sandra?

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By Barry Adams
09th Oct 2021 10:01

Are the dates correct for the second example, Sandra?

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Replying to Barry Adams:
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By johnjenkins
11th Oct 2021 09:25

Is everyone getting hiccups?

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By richard thomas
11th Oct 2021 14:51

Rebecca

In your excellent article you say:

“Where required to be submitted, the EOPS will replace the relevant pages on the SA tax return. But if the taxpayer has other income or charges, eg interest or HICBC, these will have to be reported through the new year-end finalisation service (replacement for SA return) by the same deadline.”

Is that right?

Section 8 TMA 1970, as prospectively amended by Schedule 14 to the Finance (No.2) Act 2017, includes the new subsections (1AB) and (1AC):

“(1AB) A notice to file for a year of assessment is a notice requiring the person concerned—
(a) to file the following for that year (in addition to any end of period statement for the year that may be required by regulations under paragraph 8 of Schedule A1)—

(i) such information as may reasonably be required in pursuance of the notice for the purpose mentioned in subsection (1),

(ii) a self-assessment (but see section 9(2)), and

(iii) a final declaration, and

(b) to deliver to HMRC such accounts, statements, or other documents (relating to the information filed as mentioned in paragraph (a)(i) and (ii)) as may reasonably be required for the purpose mentioned in subsection (1).

(1AC) The duty to file the things mentioned in subsection (1AB)(a) is to be complied with—

(a) where the person is not required to provide an end of period statement for the year, by making and delivering to HMRC a return containing those things, and

(b) where the person is required to provide such a statement, by—

(i) making and delivering to HMRC a return containing those things, or

(ii) providing those things to HMRC using the facility to file mentioned in paragraph 9 of Schedule A1.”

Thus it seems that where an EoPS is required, there is a choice between filing using the paragraph 9 facility or putting the information in a return. What I do not understand is what the paragraph 9 facility is for as the requirement for sending an EoPS is to use functional compatible software. Paragraph 9 says:

“Facility for complying with notice to file under section 8 or 8A

9 The Commissioners may by regulations make provision for the establishment and use of a facility enabling a person to whom this Schedule applies to file or deliver, by electronic communications—

(a) anything which under section 8(1AB) may be required to be filed or delivered by a notice to file under section 8;

(b) anything which under section 8A(1AB) may be required to be filed or delivered by a notice to file under section 8A.”

The only part of the regulations relevant to paragraph 9 appears to be regulation 3(2):

“(2) Where a relevant person has received notice to file for a year of assessment under section 8 of TMA 1970 and is required to file an end of period statement for that tax year, that person may use functional compatible software to comply with the duty to file the things mentioned in subsection (1AB)(a) for that year.”

Note that the person “may”, not “must” or “is to”, use the paragraph 9 facility to file, but obviously need not.

Thanks (2)
Replying to richard thomas:
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By Hugo Fair
12th Oct 2021 15:01

Sorry, Richard, but could you possibly explain the conclusion that you draw from your perusal of the TMA 1970 sections from which you've quoted.

Rebecca said “Where required to be submitted, the EOPS will replace the relevant pages on the SA tax return. But if the taxpayer has other income or charges, eg interest or HICBC, these will have to be reported through the new year-end finalisation service (replacement for SA return) by the same deadline.”

Whereas, although it may simply be a matter of terminology-based confusion, John Hemmings (a reputable software developer contributor to this site) seems to say that:
* EOPS is simply a Declaration that the contents of the 4 Quarterly submissions (and any subsequent updates to their values) are now agreed by the taxpayer;
* However the equivalent of a full SATR requires more values (for many scenarios a LOT more values) as well as potentially 're-allocation' of some already reported values (due to deferrals/accruals) ... so these still have to be submitted by (as yet undefined) series of other submissions - as part of the Crystallisation process;
* Only after all that can a Final Declaration be made ... equivalent to submitting a full SATR.
[Note: it's not yet clear what each of these submissions is officially called ... or whether there is a mandatory order in which they must be submitted ... or indeed how you amend the final submission if this turns out to be necessary].

Which of these route-maps is in your opinion supported by the legislation?
Or if neither, could you describe how you see the work-flow of submissions?

Thanks (1)
Replying to Hugo Fair:
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By richard thomas
12th Oct 2021 15:40

Hugo

The facile answer is that I didn't give an opinion: I asked a question of Rebecca. I will though gladly explain, but I think this might best be done in a response to your thought-provoking post "HMRC's Guidance "Using MTD for IT" on GOV.UK" on 8 October the comments on which which I have been following with interest.

I have realised belatedly that I may fall within MTD as I have a property in Spain which I let out in periods when I am not there. Having discovered that by "income" HMRC mean "turnover" it is quite likely that by 2024 I will be back at that level. I know nothing about MTD software and APIs or where I am going to get the necessary tools, but then HMRC have not told me anything. My position is compounded by the fact, common to many in my position, that the records are kept and the transactions made by the agents I use in Spain. What I get is an online spreadsheet of my account with the agents which is so constructed that I cannot even copy it into Excel.

But what this realisation of my potential involvement has caused me to do is to find all the legislation, find out what is still to come (the tertiary legislation consisting of HMRC notices and specifications), work out what the legislation means and how it compares with what HMRC have said both to the general public and in sites like the one John Hemming linked to (which is fascinating).

I had planned to post a comprehensive comment on your 8 October post and I will still do that, giving my interpretation of how the procedure is meant to work based on the legislation, including in particular the relationship between EOPS & the SA return.

This may take me a day or two, so please have patience.

Thanks (0)
Replying to richard thomas:
Tornado
By Tornado
12th Oct 2021 16:24

"This may take me a day or two, so please have patience."

A day or two seems optimistic!

You have provided yet another good example why MTD for ITSA will fail miserably. Under the current Self-Assessment system, this foreign income would slip neatly into the Tax Return preparation after the year has finished and the relevant information has been identified, checked and amended if necessary before it gets submitted to HMRC.

It is so clear to me that MTD will not be able to deal with myriad different sources of income, allowances and reliefs as the MTD system seems far too complex and will heavily rely on software that will not work properly. We have more than enough evidence from current systems to show that HMRC are unable to do the simplest of actions, such as answer a letter, and it does not take much interpolation to work out that MTD is vastly more complex than this and the chances of HMRC understanding how it all works seem slim.

It is not our problem, however, as it is the responsibility of HMRC to deliver a system that works and is compliant with Legislation, and they will also have to take the rap if there is a massive breakdown of the UK Tax System due to faulty systems and software. They need to be pragmatic and accept defeat and just spend their time and our money on improving Self Assessment which does work and can be made to work even better.

But all this, of course, is NOT OUR RESPONSIBILITY

Thanks (1)
Replying to Hugo Fair:
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By johnjenkins
12th Oct 2021 15:59

If I have read the situation correctly the intention is that the 4 quarterly updates should be accurate and only the normal end of year adjustments made to the final declaration is necessary. However HMRC have realised that this will take a while (if ever) for the self-employed and by way of not charging penalties at the start are giving way to estimated quarterly updates. Now for VAT registered business it is different. HMRC want, more or less, quarterly accounts with just the normal adjustments at year end (the final declaration). It's a total farce whichever way you look at it.

Thanks (0)
Replying to johnjenkins:
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By richard thomas
12th Oct 2021 16:14

I think it is not so much HMRC not charging penalties at the start by concession as that they can't (I assume you mean penalties for incorrect updates, not for failure to make them on time which is penalisable under the new "points mean prizes" system.

The only penalty legislation for incorrect document given to HMRC is in Sch 24 FA 2007. For there to be a penalty under this there not only has to be an inaccuracy in a document but one which "amounts to, or leads to ... an understatement of a liability to tax".

As we all know quarterly updates have no bearing on the tax liability, so there is no liability to a penalty, however inaccurate the update is. There is a penalty (of up to £3000) for failure to keep digital records though.

Thanks (1)
Replying to richard thomas:
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By johnjenkins
12th Oct 2021 16:30

Surely the whole point of quarterly updates is for them to be accurate, otherwise HMRC's two reasons for the updates, inaccuracies and tax liability, are out of the window. As for proof that the client is keeping digital records, no comment.

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Replying to johnjenkins:
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By richard thomas
12th Oct 2021 16:44

I agree but HMRC seem to be content with any old rubbish.

Thanks (1)
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By tedbuck
08th Nov 2021 10:58

The critical question is "Why is HMRC not making their plans known to the people who will have to comply with them?"
Joe Plumber doesn't even know MTD exists if he isn't VAT registered and likely even if he is it is just another bit of HMRC rubbish as nothing changed very much.
But when this lot hits him he really won't know which way is up. The cost in time and £s will not be slight but has anyone told him?
The people I have spoken to - not clients particularly - all have the same attitude - we'll let our accountants do it - until it is pointed out that extra cost will not be minimal. The attitude then is generally denial - "we'll deal with it when it happens".
The fact is that Joe hasn't the slightest idea of what is involved or the real cost and HMRC aren't going to tell him.
What I do find it difficult to understand is why the newspapers haven't picked up on it. You would have thought it a good crusading pitch for them. Perhaps they have been bought off by HMRC who seem to throw taxpayers' (sorry our) money at crazy schemes without the requisite knowledge of what the due processes will be. Have any HMRC people actually worked in real life? I bet there aren't many.
One last question - How much is this MTDfITSA project costing? I should like to know how much of my hard earned money is being p***ed against the wall by these wallies.

Thanks (1)

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