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MTD income tax: Big bang start in April 2023

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It appears that all self-employed taxpayers will have to start reporting under MTD for income tax (MTD ITSA) from 6 April 2023, which is an acceleration of up to 12 months for mandation into MTD for many unincorporated businesses.

6th Aug 2021
Tax Writer Taxwriter Ltd
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The announcement of the abolition of basis periods from 6 April 2023 has created a good deal of confusion around when exactly unincorporated businesses would be mandated into MTD for income tax (MTD ITSA), and thus when they will have to start filing quarterly submissions using MTD compatible software.

As raised on AccountingWEB’s MTD Bootcamp webinar, many businesses and accountants were planning for the transition to MTD ITSA based on the draft regulations (found in this policy update), as explained in MTD webinars run by HMRC and others.

The basic rule (set out in draft reg 4) is that a taxpayer must join MTD ITSA from the beginning of the accounting period that starts on or after 6 April 2023. Thus, if the accounting period starts on 1 April, the business would be mandated into MTD from 1 April 2024, being the first accounting period that starts on or after 6 April 2023.

Basis period change

The draft provisions that will bring into effect the shift to the tax year basis of assessment, treat an accounting period that ends on any of 31 March, 1 ,2, 3 or 4 April, as if it ended on 5 April, with effect from 2023/24. Any income and expenses arising in the few days after the end of the accounting period and before the end of the tax year will be treated as if they arise in the next tax year.

In the transition year (2022/23) taxpayers will have to report all the expenses and income of the trade that arise between the end of the accounting period that was assessed in 2021/22 and 5 April 2023 (or 31 March if that is the accounting period end). The following basis period for tax purposes to be assessed in 2023/24 will be deemed to start on 6 April 2023.  

Example

When Peter started his self-employed business he made up his accounts to the tax year: 5 April. As his business grew, he engaged an accountant: Bill, who advised him to change his accounting period to end on 31 March. Bill said it would be easier to track income and expenses to the month end, and this change would also give Peter an extra year to prepare for MTD filing. 

Peter was expecting to have to start reporting under MTD ITSA from 1 April 2024, being the first accounting period starting on or after 6 April 2023.

Under the new tax year basis Peter will have to report his business income and expenses in the following years: 

  • 2022/23: 1 April 2022 to 31 March 2023
  • 2023/24: 1 April 2023 to 31 March 2024 – tax year basis.

Peter will be required to report under MTD from the quarter starting on 6 April 2023, as the period 1 April 2023 to 31 March 2024 is deemed to be: 6 April 2023 to 5 April 2024 for tax purposes. This brings forward his start date for MTD ITSA by nearly 12 months.

The CIOT agrees this is a result from the switch to the tax year basis. Pete Miller, chair of the CIOT’s Owner Managed Business Committee, said: “Formally deeming 31 March as equivalent to 5 April is, we believe, also likely to mean that unincorporated businesses will need to follow the rules for MTD ITSA from their next accounting period starting on or after 1 April 2023, rather than 6 April 2023.”

Updated MTD regulations?

The MTD income tax regulations will have to be amended to reflect the change to the tax year basis.

Delay MTD?

The CIOT is concerned about the very tight time frame in which the switch to the tax year basis will take place.

Pete Miller commented: We would have preferred the start date for MTD ITSA to be deferred in order to accommodate a more thorough consultation process and give businesses more time to absorb the impact of the change in the basis period rules before they transition into the MTD regime.”

The ATT is more direct in its recommendation to delay the change in basis period as the pace of change may overwhelm many businesses.

Jon Stride, co-chair of ATT’s Technical Steering Group, said: “Pushing back both the start of MTD for Income Tax and this new proposal would give time to ensure that the basis period change works as smoothly as possible – and it would also allow a full 12-week consultation period.”

Discussions

We understand that discussions are ongoing between the professional accounting/tax bodies and HMRC to resolve this issue.

In response to our questions HMRC has provided this revised statement: “The government announced its intention to explore basis period reform as part of the tax administration framework review and in its consultation on basis period reform published on 21 July. Over the last few months we have been informally consulting with the tax community.

We invite further views through responses to the consultation, including on the reform’s interaction with other aspects of the tax system like Making Tax Digital. The consultation closes on 31 August and the Government will then consider all of the responses in full and will publish its conclusions in due course."

Separately we received confirmation from HMRC that mandation date for MTD ITSA is 2023.

If 6 April 2023 is to be the big bang start date for all self-employed taxpayers to commence reporting under MTD, this will have huge implications for all accountants who act for small businesses, and for tax software providers. 

Feedback

If you have views on how or whether the proposed change to basis periods should be introduced, please respond to the consultation on this issue to: [email protected] or post your comments below, and AccountingWEB will respond on behalf of the community.

The consultation closes on 31 August 2021.

For more practical tips on getting clients ready for MTD, join John Stokdyk and a panel of accountants for the next installment of the MTD Bootcamp on Wednesday 11 August.  

Replies (119)

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Replying to davidross:
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By johnjenkins
11th Aug 2021 14:22

You really don't get it do you. Why do you think we voted to come out of the EU? We are a country of common sense and flexibility and anything like quarterly updates for business earning between £10k and VAT threshold is ludicrous. Nobody has anything against digital records. What they are against is the mandatory way in which HMRC can claim MTD is the future as it will do away with all errors. Cash or its equivalent will be with us ad infinitum.
Now are banks to be trusted? Look at all the scams centred around the banking system.

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Replying to davidross:
Tornado
By Tornado
11th Aug 2021 18:35

davidross wrote:

I must disagree that this is a 'mistake'.

HMRC and the Government are having the 'cheek' to insist that traders keep proper business records! Many respondents on this thread are in effect seeking to shield those who don't want to do that. I am done with sympathy for those who think that business records are some sort of joke and to be ignored.

Whilst I am all for the British sense of entrepreneurship and the freedom to start up (without needing the permission of the Mayor, and being able to start a barber's shop when there is already one in the same street), we could still take lessons from other Countries where they do take being in business seriously.

The down side of such slackness is that it hurts others (when a business does not pay) and hurts the proprietors (when they don't make a decent living, get into trouble with their taxes, etc)

............. and now that all you have to do is pay by card and let the Bank and Software do the book-keeping, what is the big problem?

'I am done with sympathy for those who think that business records are some sort of joke and to be ignored'

This statement must be a joke itself as I cannot see any suggestions by anyone that business records are not that important. Indeed, business records are the key foundation of accurate Accounts, but they do not have to be kept digitally to be accurate.

'Many respondents on this thread are in effect seeking to shield those who don't want to do that'

This is also a distortion of the facts in that your assumption is that everyone is capable of dealing with accounting software. If people do not want to do this it is most likely because they are unable to use such software.

Your rather arrogant suggestion that other counties take business more seriously than us is an insult to all those millions of people who work very hard to create and run businesses in this Country by the quaint method of providing goods or services that people want and if they choose to do this without having to qualify as an Accountant or Book-Keeper first, then that should be their choice.

I do take you point about taking business seriously in other counties, however, and think that running a business is probably taken more seriously in Russia and North Korea, very seriously indeed I suspect.

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Replying to Tornado:
RLI
By lionofludesch
11th Aug 2021 18:52

I thought the joke was that some folk keep near-exemplary records on paper yet, more than likely, will produce anything but that on software.

We've all had unintelligible computer records, I'm sure. Often presented to us by a proud business owner who'll happily inform you that his fee should be massively reduced as he's done all the work for you.

And then you find that the records do not even approach the reality of the bank account..........

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Replying to davidross:
By kenny achampong
12th Aug 2021 13:59

Are the people getting caught up in this really 'traders' or 'in business' ? Not many I'd say. Mine include pensioners, unemployed, struggling musicians and actors, artists, handy-people, part-time decorators, etc. Quite a few of them don't even need to pay any tax. A £500 hike to their accountancy bill would be pretty catastrophic for most of them.

If they put the turnover figure upto £50K I wouldnt be kicking up such a fuss, they would tend to be traders/in business and better able to pay for it, but £10K is just ridiculous.

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Replying to kenny achampong:
Morph
By kevinringer
12th Aug 2021 14:27

As a means of simplification, SA permits businesses with turnover below £85,000 to submit a 3-line P&L on their SA return. It seems crazy that from 2023 those businesses will have to move from the couldn't-be-easier 3-line P&L to full digital records.

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Replying to kevinringer:
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By johnjenkins
12th Aug 2021 14:44

That's because the aim of MTD is for HMRC to tag every transaction, crosscheck, so they don't have to open an enquiry. They can just say according to our figures your tax return (or whatever) is wrong. So it will be up to us to substantiate whatever we have submitted without HMRC having to go through the process of an investigation.

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Replying to johnjenkins:
RLI
By lionofludesch
12th Aug 2021 16:48

johnjenkins wrote:

That's because the aim of MTD is for HMRC to tag every transaction, crosscheck, so they don't have to open an enquiry. They can just say according to our figures your tax return (or whatever) is wrong. So it will be up to us to substantiate whatever we have submitted without HMRC having to go through the process of an investigation.

The obvious snag is - is the fella who's claimed the deduction wrong or has the fella he's paid understated his income ?

Given the difficulty in actually dealing with HMRC these days, defending an assessment could be a long drawn out process.

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Replying to lionofludesch:
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By johnjenkins
13th Aug 2021 09:42

Ho Doubt HMRC will go for both. Jointly and severally as the banks like to say.

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Replying to lionofludesch:
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By sammerchant
13th Aug 2021 16:41

Won't it be fun when there are thousands of appeals in the pipeline?

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Replying to kenny achampong:
Morph
By kevinringer
12th Aug 2021 14:30

Currently the MTD VAT threshold is also £85,000. Almost all my sub-£85,000 turnover VAT clients are digitally excluded. I have already received HMRC agreement for digital exclusion for a quarter of my >£85,000 turnover clients, and I expect to obtain exemption for at least three quarters of my <£85,000 turnover VAT clients. I would expect most digitally-excluded clients to be smaller businesses and therefore expect that many (most?) <£85,000 turnover businesses will be exempt. In which case, it would save a lot of work for HMRC and agents if HMRC made the MTD turnover £85,000 permanently for MTD VAT and MTD ITSA.

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Replying to kevinringer:
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By johnjenkins
12th Aug 2021 14:49

Once broadband comes up to speed in every county, HMRC will start turning down exemptions. In fact one of the criteria for starting a business will be a bank account linked to a cloud based bookkeeping system. Unless, of course, our bodies do something about it.

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ghm
By TaxTeddy
10th Aug 2021 13:44

What would we do without Rebecca to highlight these technical points? I for one would have sailed on, oblivious to the implications of the basis period changes. Unwelcome news, yes - but still valuable.

Thanks Rebecca.

Thanks (1)
Replying to TaxTeddy:
Tornado
By Tornado
10th Aug 2021 14:28

Yes of course, thanks to Rebecca for the article and acknowledgement that without her, we wouldn't have anything to moan about. (I mean that in the nicest possible way of course).

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Replying to Tornado:
RLI
By lionofludesch
10th Aug 2021 15:48

I'm sure you'd have noticed when it became law.

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RLI
By lionofludesch
11th Aug 2021 19:02

Actually, I'm still not clear whether 1st April 2023 is the start date for just March year ends or for other year ends as well. If you have a February accounting year end, do you start MTD from 1st March 2024 ? Or do accounting year ends not matter any more ?

HMRC didn't have to make a big fuss about deeming 31 March to be 5th April - it is, after all, a natural follow on from an existing ITTOIA provision (can't remember the section number but it's two hundred and odd).

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By CORSALOVER2
16th Aug 2021 11:36

Fascinating mix of colleagues who look at this as an income opportunity and those who -like me - despair for the smaller non-computer-literate self-employed clients. What am I to tell my Wildlife Artist who paints for enjoyment and turns over perhaps £1500 p.a. and has accumulated losses of many thousands of pounds with no other income except his state pension?

I know exactly what I am going to tell him to do but would be interested to hear what you real proper professionals have to say !

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Replying to CORSALOVER2:
RLI
By lionofludesch
16th Aug 2021 11:44

CORSALOVER2 wrote:

Fascinating mix of colleagues who look at this as an income opportunity and those who -like me - despair for the smaller non-computer-literate self-employed clients. What am I to tell my Wildlife Artist who paints for enjoyment and turns over perhaps £1500 p.a. and has accumulated losses of many thousands of pounds with no other income except his state pension?

I know exactly what I am going to tell him to do but would be interested to hear what you real proper professionals have to say !

I would suggest you tell him that he's not caught by MTDfIT

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Replying to CORSALOVER2:
Morph
By kevinringer
16th Aug 2021 11:51

Turnover for MTD ITSA is £10k so micro/part-time/hobby types won't be caught. I'm more concerned with landlords because even with just one residential property many will be caught. Having said that, £10k is too low - it should be the existing MTD VAT threshold of £85k because £85k is also the threshold for the SA 3-line P&L and it would be crazy to tell a sub-£85k business they can submit a 3-line P&L but still have to digitise their records.

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Replying to kevinringer:
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By johnjenkins
16th Aug 2021 12:16

Although HMRC haven't said they are doing away with the 3 line P&l, I have to assume that once they start with the updates it will be automatic.

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