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MTD and unaligned year ends: Developers flag forecast furore

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A recent meeting between HMRC and Making Tax Digital developers flagged concerns about how the quarterly updates and the end-of-period statement required would work where businesses have accounting dates that do not align to the tax year.

8th Sep 2023
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Following on from a series of Making Tax Digital (MTD) 'co-creation' meetings between HMRC and the software industry asking for input on the much-delayed rollout to MTD for income tax self assessment (MTD ITSA), the tax authority hosted a separate online meeting on 30 August to explore one major issue: the interaction between MTD ITSA and the basis period reform rules. 

The particular concern addressed was how the quarterly updates and the end-of-period statement required under MTD would work where businesses have accounting dates that do not align to the tax year.

A key benefit of MTD ITSA, as promoted by HMRC, is that the requirement to report figures on a quarterly basis should lead to an improvement in forecast taxable profits and hence tax liabilities. More regular information in = better forecasts out, supposedly. HMRC suggests this will give businesses more time to prepare and set aside adequate funds to pay their tax liabilities.

However, there is a fundamental flaw in the plan. MTD requires quarterly reporting in line with the tax month ends (5 April, 5 July, 5 October and 5 January) whereas taxable profits will be calculated as an apportionment of the accounting period (AP), according to the new basis period rules from 2023/24

Depending on the business's year end, there could therefore be significant discrepancies between the forecast generated quarterly by the MTD software and the actual taxable profits. Put simply, the further the AP deviates from the tax year, the bigger the difference between forecast and actual taxable profits. In many cases, the forecast will be utterly meaningless and the taxpayer will be in for a massive shock when they file their year end tax return.

The impact on agents will be additional workload in dealing with queries from clients as to why their tax liabilities end up being wildly different from the forecast figures as well as the potential need to prepare more accurate forecasts to replace those churned out by the software.

For software providers, additional support load will be generated as well as potential reputational damage as confused customers take to the helplines, or worse social media, complaining that the forecasts are, in many cases, garbage.

Taxpayers themselves will, at best, experience frustration at receiving multiple forecasts that they know are incorrect and at worst suffer shock and financial anxiety on discovering that their tax liability is significantly more than forecast.

As we're used to seeing since the announcement of MTD in April 2015, HMRC has got itself into another big mess.

Possible solutions

In the meeting, HMRC asked attendant software developers for suggestions as to how this issue might be overcome. Tim Good, founder and director of Absolute Tax, offered two possibilities:

Option 1

Force every business under MTD ITSA to align their AP with the tax year. There's little point in dwelling on this as we all know it's never going to happen.

Option 2

Suppress the forecasts. This idea is based on the fact that, according to HMRC, 93% of current self-employed taxpayers have aligned APs and therefore will not be affected. The 7% with non-aligned APs are most likely to belong to the following sectors:

  • Legal and accounting
  • Insurance
  • Farming
  • Finance
  • Accommodation

The vast majority of these are likely either to be represented by agents who can prepare far more reliable forecasts of their tax liabilities than the MTD software, or sophisticated enough to work it out for themselves. 

Taxpayers falling into this category are unlikely to benefit from automatically generated tax liability forecasts at all. Indeed if the forecast differs significantly from the actual figure it will only lead to confusion and in many cases anger at the software, at HMRC, or both. 

To avoid the ensuing extra support load, both for the software companies and for HMRC's ailing helplines, Good suggested building into the software (perhaps even mandating) the option to suppress the tax liability forecasts altogether where APs are non-aligned.

Software developers will meet with HMRC again at the next 'co-creation' webinar. Until then we wonder whether any of our readers have suggestions on how to overcome this latest hurdle?

Replies (53)

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By Nebs
08th Sep 2023 15:58

This doesn't really address the exact question, but it may make it more palatable. Indexation for Overlap Relief.
I seem to recall that when self assessment was introduced the question of indexation for overlap relief was raised. HMRC said that as taxpayers could choose whether to, and when, to change their accounts year end to 31st March or 5th April, they would oppose any indexation.
Perhaps now is a good time to review that, as they are forcing profits to be calculated for 2023/24 based on the year or more to 5th April 2024, less any overlap profits.

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By DonDan
08th Sep 2023 16:32

This is all very boring and very predictable.

Yet another example of what a pointless exercise MTD is. Noone cares about estimated tax calculations that will have no bearing on the end result.

We're in a position now where HMRC have invested so much money into this stupid scheme that they are pushing on regardless. It's not going to help them or the clients or the agent. It might possibly help the software companies i suppose.

If HMRC want quarterly payments on account, i dont think anyone is going to complain too much.

Just give it up, spend the money on training the HMRC staff so they can be of some assistance to agents and tax payers and let people just get on with what they're doing.

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Replying to DonDan:
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By johnjenkins
11th Sep 2023 11:07

Isn't estimated assessments going "BACK" to pre SA days?

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Replying to johnjenkins:
Morph
By kevinringer
11th Sep 2023 11:12

Yes, MTD ITSA is replacing the certainty of SA with uncertainty. How can that be progress?

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Replying to kevinringer:
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By johnjenkins
11th Sep 2023 11:15

So you could say that MTD ITSA is in conflict with SA. There's a surprise.

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By Catherine Newman
08th Sep 2023 16:45

People are already venting their frustrations vociferously at the lack of refunds. How would estimated projections provide projections for payments on account? Will they know that the client is going to carry on in business or not/invest in plant and machinery in the next year?

RIP MTDITSA.

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Replying to Catherine Newman:
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By Hugo Fair
08th Sep 2023 18:19

MTDITSA certainly needs to be buried (although a silver bullet followed by total cremation might be safer) ... but I don't really care whether or not it rests peacefully.
Frankly it can rotate on a spit over the eternal fires of damnation without troubling me.

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Replying to Hugo Fair:
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By Catherine Newman
08th Sep 2023 18:33

Dodo springs to mind.

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By ireallyshouldknowthisbut
08th Sep 2023 17:43

I am surprised there are developers left talking to HMRC about such matters. It's a dead project running purely on inertia. Developers are free to add tax estimates to their software if there is such demand for this feature without mandating pointless quarterly reporting for the majority.

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Replying to ireallyshouldknowthisbut:
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By Catherine Newman
08th Sep 2023 18:33

I agree. Dodo.

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Replying to ireallyshouldknowthisbut:
By Nick Graves
11th Sep 2023 12:31

ireallyshouldknowthisbut wrote:

I am surprised there are developers left talking to HMRC about such matters. It's a dead project running purely on inertia. Developers are free to add tax estimates to their software if there is such demand for this feature without mandating pointless quarterly reporting for the majority.

Kinetic, not inertia.

[/pedant]

Wish the whole bloody thing would go kinetic, mind...

It's got the potential energy to destroy all businesses.

You'll own nothing and they'll still be tormented.

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By AdamJones82
08th Sep 2023 19:42

Why are these people wasting time talking to each other?

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Replying to AdamJones82:
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By spilly
08th Sep 2023 21:32

There was probably free coffee and biscuits, maybe even a lunch?

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Replying to spilly:
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By martinatal
15th Sep 2023 15:51

Free? Paid for by the tax payers.

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Head of woman
By Rebecca Cave
09th Sep 2023 08:01

Excellent article , with superb inside information!!

Seriously through - why are these conversations between HMRC and software developers happening only now?

This issue of useless/ misleading quarterly tax forecasts should have been hammered out and sorted back in 2016/17. It was clear to any accountant who looked at the MTD proposals in detail that quarterly tax forecasts were a design fault which could undermine the whole MTD for business structure.

How/Why has the MTD project managed to get so far without someone pointing out to HMRC that this particular structural beam will crumble on contact with real businesses?

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Replying to Rebecca Cave:
Tornado
By Tornado
09th Sep 2023 20:53

How/Why has the MTD project managed to get so far without soemone pointing out to HMRC that this particular structural beam will crumble on contact with real buisnesses?

I think the answer to this is that there are a lot of people who are benefitting from keeping this project alive with Goverment still pouring tens of £millions into it. Why would anyone in that position want it to stop.

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Replying to Rebecca Cave:
By Duggimon
11th Sep 2023 10:19

The conversations have been happening for a long time, and the issues have been pointed out repeatedly but it seems HMRC are only just starting to notice now that their 'plan' for MTD is quite complicated and doesn't account for the edge cases and non-standard arrangements that make up about 98% of all taxpayers.

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Replying to Rebecca Cave:
Morph
By kevinringer
11th Sep 2023 10:38

These problems were all highlighted in HMRC’s 2017 consultation. At the time in 2017 HMRC were going to let businesses chose their MTD ITSA quarter end, see https://assets.publishing.service.gov.uk/government/uploads/system/uploa...

“42. Businesses will be free to change their quarterly cycle to end on any day in the month, which should help mitigate any ‘quarter end’ rush for agents.”

Back then, there was no mention of basis period reform, which has made MTD ITSA even more complex.

The above document makes interesting reading today 6 years later because though HMRC didn't at the time take seriously the problems raised, HMRC is only now realising we were right all along. That proves the 2017 consultations were only a window dressing exercise, and not a serious attempt of obtaining feedback.

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By Open all hours
09th Sep 2023 16:47

When oh when will HMRC engage properly with those of us who know what we are doing instead of tea and cakes with a set of day dreaming charlatans?

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By RobertD
11th Sep 2023 09:54

Option 3: Scrap the whole thing.

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By JackH
11th Sep 2023 10:05

Whoever is charged with working this project in HMRC should be immediately redeployed e.g. to answer the phones and online helplines

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By Alanpryan
11th Sep 2023 10:10

It's not funny at the moment, but in years to come there will be a sit-com based on all this

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Replying to Alanpryan:
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By johnjenkins
11th Sep 2023 11:11

I think you'll find MTD was based on "Yes Minister".

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Replying to johnjenkins:
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By Open all hours
11th Sep 2023 11:20

Try The Long Johns from 2006 about tech the NHS. ‘Is the government a good customer’. Reply is along the lines of : Ideal customer, they understand nothing and pay everything.

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Replying to johnjenkins:
By Nick Graves
11th Sep 2023 12:32

The Brittas Empire.

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By petestar1969
11th Sep 2023 10:30

How about they just bin off MTD ITSA altogether?

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Replying to petestar1969:
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By johnjenkins
11th Sep 2023 15:02

There is a school of thought that all this "huffing and puffing" by HMRC, means that they have actually realised that MTD ITSA as they see it will not work. Digital records will eventually work and that's it.

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By Moo
11th Sep 2023 10:43

'For software providers, additional support load will be generated as well as potential reputational damage as confused customers take to the helplines, or worse social media, complaining that the forecasts are, in many cases, garbage.'
Well boo hoo for the software providers, I'm sure all the tax professionals will be weeping tears by the bucketload for them.
Of course some of us have already been carrying an additional support load because of this nonsense doomed project, not seen much evidence of sympathy from HMRC or their software buddies for us.

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By Moo
11th Sep 2023 10:51

'Tim Good, founder and director of Absolute Tax, offered two possibilities:'
Excellent news that Tim Good was in the room, someone with actual tax knowledge and experience is always going to come in handy but until Tim is recruited to replace Jim Harra I suspect his influence may not be sufficient to bring about sanity.

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By BarryHWhite
11th Sep 2023 10:51

HMRC is in the worse mess I have know in 50 odd years as a C.A.
Their new systems are full of errors and complexities.
The old Agent Account now New Agent Account - transfer of clients does not work either en mass, or just adding one old client (my wife) into the new system. It said her Driving Licence and/or Passport details were wrong. I have sent them photos showing they are correct.
My most recent letter from HMRC was answered after 9 months.
Simple suggestions for improvements in systems are mainly ignored, but even if they said are good ideas they are never implemented.
Help lines for agents suspended.
Phone times often over 1 hour.
But they keep on introducing new online systems.

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Morph
By kevinringer
11th Sep 2023 10:59

"...agents who can prepare far more reliable forecasts of their tax liabilities than the MTD software..."

This is the first I've heard of MTD software forecasting income. That's a whole different can of worms. Forecasting will be essential even for 31 March year ends because tax is annual and to make any reasonable attempt to forecast tax liabilities after filing each MTD ITSA quarter, a forecast will have to be made of income for the remainder of the year. So forecasting will apply to 100% of MTD ITSA businesses, not just 7%.

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Replying to kevinringer:
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By Moo
11th Sep 2023 11:23

I think you misunderstand Kevin.
In magical MTD land the people having to report quarterly only have their MTD income.
No savings income, no dividends, no foreign income, no pensions, probably no PAYE income either.
I daresay that they don't pay pension contributions or gift aid.
Or receive taxable benefits or child benefit.

I recall an enthusiastic article on AWeb a couple of years ago by a regular contributor saying that being pushed onto cloud accounting packages in anticipation of MTD was working out fine for her clients who seemed to be mostly self employed hairdressers.
Nuff said.

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Replying to Moo:
By ireallyshouldknowthisbut
11th Sep 2023 11:38

Moo wrote:

I think you misunderstand Kevin.
In magical MTD land the people having to report quarterly only have their MTD income.
No savings income, no dividends, no foreign income, no pensions, probably no PAYE income either.
I daresay that they don't pay pension contributions or gift aid.
Or receive taxable benefits or child benefit.

I recall an enthusiastic article on AWeb a couple of years ago by a regular contributor saying that being pushed onto cloud accounting packages in anticipation of MTD was working out fine for her clients who seemed to be mostly self employed hairdressers.
Nuff said.

Don't laugh, but I was told that once this all works, HMRC will be able to accurately forecast all those other incomes due to the feeds from all those sources flowing into HMRC from RTI etc. In real time.

Its hard to know if these well meaning people
(1) Know they are lying, and just trot out the party line
(2) Are very gullible
(3) Just have zero life experience, or indeed HMRC experience

its full on "space pen" time vs using a pencil*

*I know its a myth.

After what 6 years of operation, tax returns still do not pick up data feeds from HMRC in any meaningful volume until virtually the end of the year, but which time the tax season is all but over.

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Replying to ireallyshouldknowthisbut:
Morph
By kevinringer
11th Sep 2023 11:57

HMRC might hide behind the "SA is old technology" excuse for the SA API not working. In contrast, RTI is new technology and been live for several years now, but we still have plenty of clients for whom HMRC don't appear to have received/processed some of the submissions. Ironically, HMRC's older technology is far more reliable and user-friendly than the new technology: contrast the old VAT portal with the ASA.

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Morph
By kevinringer
11th Sep 2023 11:15

The article says:

"...the forecast generated quarterly by the MTD software..."

Please can someone from the software industry clarify whether forecasting is a requirement of MTD ITSA software.

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Replying to kevinringer:
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By Amy Chin
11th Sep 2023 18:05

Hi Kevin,

On reflection the term 'forecasts' was a misnomer - in answer to your question, no commercial software is required to produce forecasts. The issue arises where quarterly figures are reported via MTD and the HMRC system produces an estimated tax liability which could differ significantly from the actual tax liability where APs are non-aligned with the tax quarters.

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Replying to Amy Chin:
Morph
By kevinringer
12th Sep 2023 09:31

Thanks for clarifying 'forecasts'.

You say "The issue arises where quarterly figures are reported via MTD and the HMRC system produces an estimated tax liability which could differ significantly from the actual tax liability where APs are non-aligned with the tax quarters."

But the tax liability problem affects 100% of taxpayers, whether their APs are aligned or not. Consider a business with 5 April year end. They submit their first MTD quarter to 5 July. The tax liability estimation can only take into account 3 months income, so the estimate will be wrong. The tax liability estimation could attempt to extrapolate the 3 months to 12 months, but that would only work if the business income and expenditure was consistent all year. Not one of my clients (self-employed or rental) has the same income and expenditure every quarter. HMRC knows this from VAT returns. Even a business with constant turnover will have variations in expenses; many expenses are annual, then throw into the mix capital allowances etc. Also, the quarterly adjustments don’t take into account stock and accruals. I act for a lot of farmers. Even the smallest farming business can have stock valued at 5-figures (often valued more than the annual profit). Therefore, even Q4 will be wrong because of the absence of stock. This all assumes turnover is constant. Many businesses don’t have constant turnover; they are seasonal in nature (tourism, hospitality and many more). I am in no doubt that even aligned businesses will be presented with very inaccurate tax estimations until their final return is submitted for the year. That means MTD will be presenting taxpayers with misleading information until the final MTD ITSA return is submitted. Contrast that with existing SA where taxpayers are presented with no information until the final SA is submitted. So, the difference between MTD and SA is that MTD will present misleading information for most of the year compared to SA presenting no information. I would argue that being presented with no information is better than misleading information.

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Replying to kevinringer:
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By johnjenkins
12th Sep 2023 09:46

Kevin, every one of HMRC's arguments for MTD has been proved wrong and MTD isn't even up and running.
Someone with a bit of bottle surely has to say " there will be a box on the tax return to say that the figures have been produced digitally". QU will never happen and should not even have been suggested.

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Replying to kevinringer:
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By raycad
12th Sep 2023 17:02

Replying to Kevin Ringer post 11/9 at 09.31:

Kevin, rather than just thanking your post I will go further and say that it neatly summarises EVERYTHING that the ill-conceived MTD concept involves. It is inbuilt design failure of Boeing 737 Max proportions. But did anyone listen then? No! Not until it had crashed and burned on two separate occasions.

Yes, of course there will be those still with a vested interest who want to continue with this stupidity. Or those who simply feel unable to go to the Head Honcho and say "Your Majesty has no clothes on!"

I have always held the view that MTD was simply a Trojan Horse to bring in quarterly payments. If I am right about that then just bring it on, for Christ's sake! The simplest way would be to make the current half-yearly POAs quarterly payments. But they could also mandate for quarterly POAs based on the taxpayer entity's own CY estimates. That's pretty much how it works for CT Quarterly payments, after all.

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Replying to raycad:
Morph
By kevinringer
12th Sep 2023 17:20

Agreed, if HMRC want quarterly payments, then bring them in. For some clients, quarterly payment might be helpful as they could ease cashflow. There is no need for QU because if anything, they are likely to under estimate the tax and if they were linked to quarterly payments, would end up with large one-off end of year payments.

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Replying to raycad:
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By johnjenkins
13th Sep 2023 12:03

The simplistic answer is (what quite a few of us stated at the pre start of SA) have the year end at 31st March and then allow monthly payments to clear the tax liability instead of this ridiculous 31st Jan (all christmas bills coming in) and 31st July (start of holiday season).

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Replying to kevinringer:
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By Amy Chin
12th Sep 2023 19:10

kevinringer wrote:

Thanks for clarifying 'forecasts'.

You say "The issue arises where quarterly figures are reported via MTD and the HMRC system produces an estimated tax liability which could differ significantly from the actual tax liability where APs are non-aligned with the tax quarters."

But the tax liability problem affects 100% of taxpayers, whether their APs are aligned or not.

Agreed. This particular webinar was focused on non-aligned APs but it will of course also affect the vast majority of taxpayers where income and expenses are not consistent throughout the year.

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By Yossarian
11th Sep 2023 12:09

More Titanic deck chairs being rearranged I see.

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By cmiskin
11th Sep 2023 12:28

The issue with non tax year accounting periods is more fundamental than just inaccurate estimates. It is how the design copes with getting from quarterly updates for fixed quarters (which are stored by HMRC and played back) to accounting periods and then from accounting periods to the tax year basis (in some cases using estimates for the second AP). This has not yet been resolved (not for any lack of it being raised as a major issue).

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By johnjenkins
11th Sep 2023 12:53

So, if i've got this right. SA is to be done away with, we and or tax payers will give HMRC quarterly figures and they will tell us how much and when to pay. If we disagree we will have to appeal and show why. I've probably not put this right but in essence, agents will be bypassed. This is all in order to eliminate errors and make sure the tax payer knows just how much tax to pay and when.
Sounds brilliant to me. Can't see any problems.

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Replying to johnjenkins:
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By Jimess
12th Sep 2023 10:45

Agents are already being bypassed. I have lost count of the number of clients who have received HMRC correspondence and we have not been copied in to it. It's getting worse.

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By Mr J Andrews
11th Sep 2023 13:57

Good to see the only benefactors from this whim are at loggerheads.
Surprisingly nobody came up with the sensible Option 3 of scrapping the dumb idea.

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Replying to Mr J Andrews:
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By johnjenkins
11th Sep 2023 15:13

Maybe when HMRC put it off for another 3 years.

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Replying to Mr J Andrews:
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By Moo
11th Sep 2023 15:59

Said it before and will no doubt say it again.
The people the tax profession should now be talking to about this are Labour.
The Tory government will string the whole disaster out until the next election and then claim that everything bad that happens is due to Labour financial and fiscal incompetence.
Rachel Reeves & Co need to be aware that not only is HMRC depleted and poorly run but also with MTD they are sliding into a sh*t show.

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Replying to Moo:
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By johnjenkins
11th Sep 2023 16:06

"sliding"?

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