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MTD ITSA delay: Questions to answer | accountingweb
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MTD ITSA delay: Questions to answer

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While a delay to the MTD ITSA timetable may have been on many Christmas wishlists, there are still questions left unanswered.

20th Dec 2022
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The staged roll-out of Making Tax Digital for income tax self-assessment (MTD ITSA) from April 2026 is welcome, but this delay throws up further questions about the whole MTD project, which we will put to HMRC in 2023.  

Turnover threshold 

For over six years tax professionals have been screaming into the void that a £10,000 turnover threshold for MTD ITSA was way too low.

It seems the government has finally listened, and the new MTD ITSA entry threshold will be set at annual turnover of £30,000 from April 2027. Initially a higher entry turnover threshold of £50,000 will apply from 6 April 2026.  

The government says it will now commence a review into the needs of smaller businesses, and in particular those with turnover under the £30,000 threshold. This review will inform “the approach for any further roll-out of MTD for ITSA after April 2027.” 

I have stressed the “any” in that statement. This implies that the £10,000 turnover threshold for MTD ITSA may be replaced with £30,000 permanently, and the roll-out of MTD to companies is now in some doubt.

The £30,000 base threshold will exclude hobby businesses and smaller landlords from MTD reporting, which is the group most likely to find MTD ITSA reporting a problem.

Step by step 

This gradual roll-out of MTD ITSA is sensible approach, but is it too rushed?

The mechanics of the quarterly reporting and finalisation of the tax year need to be live tested by businesses who are able to cope with reporting digitally. Once this works for these businesses and landlords, only then should the entry threshold be reduced to bring in the rest of the population who are potentially subject to MTD. 

We know this approach works, as this is the pattern that MTD for VAT followed. But in that case, there was a three-year gap between the larger businesses (turnover in excess of £85,000) joining MTD in 2019, and the mandation of voluntarily registered VAT traders from April 2022.     

When will the pilot be expanded?

Paul Aplin comments: “The limitations on entry to the pilot made an MTD deferral of some kind inevitable. The pilot will not (and cannot) gain any real momentum until it includes non-fiscal year-end businesses.”

We are back – or should be back – to the Carter Principle: the whole system needs to be tested in “live” and open to all permutations of income and deductions for at least a year before anything is mandated.   

The minister’s statement says most taxpayers within the scope of MTD ITSA will be able to sign-up voluntarily before they are mandated to do so. This indicates that the MTD pilot will be expanded soon, but when?

HMRC has confirmed to ICAEW that the MTD ITSA pilot will not open to businesses with accounting periods that do not use 5 April year end, until 2024.

Why is quarterly reporting needed?

The minister, Victoria Atkins, made no mention of quarterly reporting in her written statement, so we must assume that this aspect of MTD reporting will remain in place. 

However, the justification for quarterly reporting has never been made convincingly. If accountants cannot be persuaded that quarterly reporting is necessary, they won’t be able to sell the MTD project to their clients.  

I would like to see a frank discussion with HMRC around why quarterly reporting is such a key part of MTD ITSA. Is the only purpose of quarterly updates to prove the business is keeping digital records, as I suggested last year?      

Will tax payments switch to quarterly?

Many accountants have leapt to the conclusion that the timing of self assessment income tax payments will shift to quarterly to match the MTD ITSA quarterly reporting, but this has always been denied by HMRC.

A switch to quarterly payments was indeed suggested in the Timely payment consultation but the government’s conclusion was that no changes to income tax payment dates would be made “in this parliament”.

If the purpose of MTD ITSA is to accelerate the payment of tax, the government should be honest about this and consult fully on the details.       

Why change to the tax year basis?

This MTD delay calls into question the rush to force all unincorporated businesses to report profits on the tax year basis from April 2024, with 2023/24 as the transitional year. 

Around one-third of all partnerships (130,000 businesses) are affected by the shift to the tax basis, but partnerships now have a start date for MTD ITSA beyond April 2027. Switching to the tax years basis at this time is unnecessary, expensive, and will create errors in reporting.

Will the government listen to businesses and scrap the switch to the tax basis? 

Will there be a proper consultation?

Paul Aplin has been a champion of using digital tools in tax compliance for years, but he is concerned about the breadth and depth of the promised review.  

Aplin comments: “The review the government has now promised needs to be a full and open reappraisal of the purported benefits and inevitable burdens for very small businesses. If businesses see a clear case for digital record keeping – and in many cases, even for the very smallest businesses, there is one – they will adopt it. They should not be forced.”

Other questions 

There is a raft of other questions that need to be revisited around the MTD ITSA project, including:

  • Why has HMRC ruled out providing free software to taxpayers with the simplest affairs?
  • Who is responsible for the tax calculation and who pays the penalties if the calculation is wrong? 
  • How will errors in quarterly updates be corrected?
  • How will taxpayers claim exemption from MTD filing?
  • How will the system cope with taxpayers who have more than one tax agent?

This story is far from over.

Replies (83)

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By Barkster
20th Dec 2022 16:43

So what does this mean for the Basis Period Reform ?

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Replying to Barkster:
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By Philysis
20th Dec 2022 20:38

It’s dead duck

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Replying to Philysis:
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By HelenHally
21st Dec 2022 11:30

Has it been categorically stated anywhere that the basis period reform has also been put on hold? As the reason for basis period reform was entirely to fit in with MTD ITSA, it would seem logical to postpone it too. But can find no reference to potential postponement anywhere.

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By Paul Crowley
20th Dec 2022 16:56

It is just a push back, not reform
HMRC have not a clue yet how to answer questions honestly
Nothing changes

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Replying to Paul Crowley:
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By Hugo Fair
21st Dec 2022 11:31

Delay or slow death/cancellation?

The software companies have started to vote with their feet ... see today's update to "Find software that's compatible with Making Tax Digital for Income Tax":

* 20 December 2022: "A software supplier's details have been removed from the ‘Software in Development’ section"!

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Replying to Hugo Fair:
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By Paul Crowley
21st Dec 2022 16:01

If I were in the MTD ITSA software business then I would be pi55ed off.
Take the easyvat line of figure it out once the system is functional
No sympathy at all with those planning massive income based on HMRC useless plans
Those who planned early were taken for a ride by HM Gov

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By CJaneH
20th Dec 2022 17:21

My Views on Basis period reform are:
1 Income tax year needs to move to 31st March. Bookkeeping is generally monthly.
2 Why not enforce all new unincorporated businesses to have 31st March Year end.

Postpone compulsory change. In time incorporation, retirement, business failure & utilising bad years to change the year end would deplete the number being forced to change within a fixed time frame.
I realise there may be some larger professional & other businesses out there but it would be a start.

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Replying to CJaneH:
paddle steamer
By DJKL
21st Dec 2022 09:29

The reason against is what will happen to the golf handicaps of accountants, if they all work flat out for x months post 31st March but then have little to do for the following y months after the lodging deadline?

Could work if lodging deadline became 12 months but find it unlikely HMG will ever wish a longer lodging window.

And what about auditors for listed companies, frantic three months then nine months on the beach.

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Replying to CJaneH:
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By fozia
21st Dec 2022 10:26

Better still move it to December - calendar years are more in line with the rest of the planet and easier to explain to clients!

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Replying to CJaneH:
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By listerramjet
21st Dec 2022 10:36

surely making all unincorporated businesses have the same year end date is a stupid idea. The logjam caused by the tax year end date is bad enough

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Replying to listerramjet:
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By CJaneH
21st Dec 2022 11:08

If you remove the MTD you have till January after the 31st March, so not a log jam!

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Replying to listerramjet:
the sea otter
By memyself-eye
21st Dec 2022 11:21

Nor stupid, sensible.
When I had clients they all had 31 March year ends.
10 months to submit, not a problem.

There is also the PAYE year to consider.

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Replying to memyself-eye:
paddle steamer
By DJKL
21st Dec 2022 17:31

Listed companies only have I think 4 months. (6 during Covid)

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By GHarr497688
20th Dec 2022 17:38

HOLD ON : the text of the statement says

"The mandation of MTD for ITSA will now be introduced from April 2026, with businesses, self-employed individuals, and landlords with income over £50,000 mandated to join first"

Rebecca you say Turnover and the statement says Income. Income usually refers to Net profit or Net Income so HMRC have yet again misled us all.

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Replying to GHarr497688:
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By CJaneH
20th Dec 2022 17:53

I think that she has assumed that politicians and civil servants do not know the difference between the precise meaning of turnover and the vaguer term income and for the while we have assumed that Turnover was meant.

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Replying to GHarr497688:
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By Philysis
20th Dec 2022 20:41

Come 2026 that figure will change upwards 100k this is hmrc surely they are are in last chance saloon , can’t wait for public accounts committee to see call em in to see how much Jim Harra has wasted on this futile project . I’m sure the nurses will watch . Nice one Jim , you were a great Covid marshal as you posted on LinkedIn bye I’m sure you will checking your pension benefits , Ill health coming retirement , Jim ? Probably …!

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Replying to GHarr497688:
Head of woman
By Rebecca Cave
21st Dec 2022 07:04

The ICAEW have confirmed that where the Minister said 'income' what she actually meant was 'turnover'.

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Replying to Rebecca Cave:
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By GHarr497688
21st Dec 2022 09:23

Many thanks for clarifying. Maybe the Minister should invest in a night school course to teach her the difference between Turnover and Income or she could invest in digital tools to assist her as apparently they prevent error . After all the MTD digital readiness team told me to tell my 85 year old farmer to take a night school course in Accounts and IT so he could comply with MTD VAT .

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Replying to GHarr497688:
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By Jimess
21st Dec 2022 10:09

Jim Harra too! He also referred to "income" rather than "turnover" in his HMRC Help and Support message that came out yesterday.

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Replying to Jimess:
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By Open all hours
21st Dec 2022 11:28

Guess this explains the tax gap calculations?

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Replying to Open all hours:
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By Jimess
22nd Dec 2022 15:04

Ah yes - the tax gap that HMRC are trying to close with MTD but no matter how we try to explain why it won't they stick their fingers in their ears and hum a tune.

It would have given me a bit more confidence in HMRC if Mr Harra had demonstrated that he understood the difference between turnover and income by reviewing and correcting his statement before he signed it off - but perhaps I expect too much.....

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Replying to Jimess:
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By richard thomas
22nd Dec 2022 16:04

Surely everyone knows that HMRC have legislated to say that "income" means "turnover". It is only luddites, naysayers and the Parliamentarians who passed all tax law since 1803 who think that a trader's income means its incomings less its outgoings and think that ITTOIA Parts 2 and 3 still have relevance in a digital age.

Tongue extracted from cheek; regulation 21(5) of the Income Tax (Digital Requirements) Regulations 2021 put aside.

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Replying to GHarr497688:
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By dstickl
21st Dec 2022 10:16

Which - in my opinion - very clearly raises the necessary question of:
• Why has HMRC ruled out providing free software to taxpayers with the simplest affairs?
CONCLUSION: If HMRC are truly convinced that MTD is so robust, then the only convincing rationale HMRC could conceivably offer would surely be - ahem - the providing of free software to taxpayers with the simplest affairs !

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Replying to dstickl:
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By GHarr497688
21st Dec 2022 10:22

I have yet to meet anyone apart from HMRC and Software houses that support MTD and even then the Software houses are having second thoughts . I am sorry but I believe HMRC need to get their own house in order before telling everyone else what to do. Although most of the staff at HMRC are preoccupied with Xmas shopping at the moment.

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Replying to GHarr497688:
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By dstickl
21st Dec 2022 10:28

So then, by their industrial inaction, one has to think that HMRC conclude that MTD is not possible for the very small income people, who clearly need the professional assistance of HMRC in accordance with HMRC's Charter, in my ever so 'umble opinion.

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Replying to Rebecca Cave:
By Nick Graves
21st Dec 2022 12:55

Rebecca Cave wrote:

The ICAEW have confirmed that where the Minister said 'income' what she actually meant was 'turnover'.

Does that mean my Cunning Plan to tell all my clients to go contract hire Porsches has gone awry?

Damn...wouldn't have minded an Alpina myself.

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By Hugo Fair
20th Dec 2022 18:02

All relevant questions (of course), Rebecca, but they can all be wrapped up in a single sheet of paper labelled ..."When will there be a single cohesive plan for the whole project?"
And if you want a subsidiary question, how about ... "And will the clock only start ticking to ANY deadline AFTER such a plan is published?"

FWIW I feel it's best sticking to the same old 'gaps' in the core project until/if we ever get a full plan ... as there's a danger with too many ruddy coloured fish that HMRC can concentrate on (in their mind) debunking those whilst ignoring the central issues. For instance ...

* "Why has HMRC ruled out providing free software to taxpayers with the simplest affairs?"
Because they purport to believe it's not in their remit to 'compete' with the open market - and have been trying to extricate themselves from BPT since day two (and resolutely refused to even entertain the idea of providing any help for AE and other like examples).

* "Who is responsible for the tax calculation + who pays the penalties if the calculation is wrong?"
HMRC have always maintained that the responsibility cannot be 'outsourced' by the taxpayer (and always insist that any results from software provided by them is 'only advisory' - see CEST etc) ... and software companies have had decades to get the T&Cs watertight against consequential damages.
So no danger of volunteers forming an orderly queue to accept the liabilities!

But 'errors/corrections' and 'multiple systems/agents' and 'exemptions' are indeed (along with many other aspects listed in here over the last couple of years in particular) worthy of focus.

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By D V Fields
20th Dec 2022 19:38

One question should be “Why is Jim Harra still employed?”
We are all are aware of the three certainties in life, being death, taxes and of course projects running late. However it’s hard to find any positives from this sorry saga. My caution is to be careful what you wish for. Prime candidate for replacement could be Paula Vennells. After all she is sitting on otherwise redundant software that would bridge the tax gap overnight.

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Replying to D V Fields:
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By dstickl
21st Dec 2022 10:19

Ho ! Ho ! Ho !

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By adjadj
20th Dec 2022 20:01

It would be unwise to expand MTD ITSA in April 2027 as the MTD end-of-year processes for 2026/7 would not have used in live mode by the time new people start on 2027/8. Inevitably there will be issues with the new MTD end-of-year processing. Prudence would dictate that corrections should be tested in a further cycle before another million people are added to MTD. This would mean starting the new tranche in April 2029.

The delay until 2026 provides plenty of time to have a detailed review of the HMRC digitisation plan and refocus its attention onto the elements that bring benefits in the medium term and also allow the phasing out of old systems that are costly to maintain. Ideas to consider are:
a) Discontinue quarterly reporting so removing difficult to resolved problems that have been noted by Rebecca today or rehearsed elsewhere
b) HMRC has invested an enormous amount in backend processing. Accounting software providers have invested millions in providing an end-to-end solution that uses multiple APIs for the end of year processing. Could this be tweaked and deployed independently of MTD ITSA?
c) HMRC is developing an Update and Submit a Tax Return service to replace the SA system for those in MTD ITSA. The SA system is showing its age and is run on the old technology. Could this work be accelerated so allowing the clunky, expensive to maintain, SA system to phased out much more quickly?

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By Philysis
20th Dec 2022 20:55

It’s a boring story to be honest , the current system works well thanks to the army of superb accountancy / tax provider , hmrc do nothing but process inputs from a stellar army of professional people . Hmrc processing is inefficient outdated and embarrassing they can’t answer a phone correctly or write a timely letter . accountancy profession ensures tax collection in uk works not hmrc are a checking service of no value, and promote fear with shock tactics , a uk system all about consent , self regulation ie self assessment and uk people make it work not hmrc they are an avoidable cost together needs reducing further not software complexity , privatise tax collection to accountancy providers

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Tornado
By Tornado
20th Dec 2022 22:43

"We are back – or should be back – to the Carter Principle: the whole system needs to be tested in “live” and open to all permutations of income and deductions for at least a year before anything is mandated. "

An excellent criteria, but that can never happen with MTD for ITSA, it will simply never work well enough to get anywhere near that sort of stage in the first place.

Kill it off now before many more thousands of millions of pounds are wasted on this failed project. (Our money of course and how many Hospitals are we foregoing to support this rubbish).

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By Postingcomments
20th Dec 2022 22:53

I have this idea (which I may have imagined) that your plan was to cruise into retirement writing about MTD, retiring as it came in.

Are you delaying retirement in line with MTD?

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Replying to Postingcomments:
Head of woman
By Rebecca Cave
21st Dec 2022 07:07

Yes.

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Replying to Rebecca Cave:
Tornado
By Tornado
21st Dec 2022 08:07

You may never retire then :)

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Replying to Tornado:
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By Philip_Winter
21st Dec 2022 11:35

I have/had the same plan. The implementation of MTD ITSA has been delayed now five times and for eight years by HMG/HMRC.

I'm finally abandoning that plan. Life is too short - and getting shorter all the time!

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LL
By RickyRoark
21st Dec 2022 09:43

HMRC be out here suggesting total digital financial surveillance of the population and you guys are on here debating turnover and income thresholds.

MTD is not a discussion. People suggesting it need to get in the sea.

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Replying to RickyRoark:
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By philaccountant
21st Dec 2022 10:33

This is basically inevitable. Governments are heading towards digital currencies and cashless societies. That means they will be able to monitor every transaction in real time in the not too distant future. Also means being able to turn off a person's access to money in seconds. This is far too powerful a tool for the spooks to not want their hands on.

It will happen first in China. We'll see politicians cry out here at how authoritarian it is, then we'll be implementing it through the back door in 5-10 years time afterwards.

(Not to mention the ability they will have to collect taxes such as VAT in real time at source, i.e. when the transaction takes place the till will take £120 from your account, deposit £100 in the shopkeeper's account and £20 in HMRC's.)

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Replying to philaccountant:
Tornado
By Tornado
21st Dec 2022 11:35

"(Not to mention the ability they will have to collect taxes such as VAT in real time at source, i.e. when the transaction takes place the till will take £120 from your account, deposit £100 in the shopkeeper's account and £20 in HMRC's.)2

This reminds me of the original fantastic plans for Real Time Information which was going to revolutionise the way we deal with Benefits.

The idea was that the employer would submit returns to HMRC for all employees mainly providing gross pay, employers NIC and other employer contributions for the period (the total cost to the employer of each employee). The employer would then make a payment to HMRC for the total cost to them. (The payment to HMRC would probably be taken by Direct Debit.)

HMRC would then gather together similar information from all other sources for each person for the month under review (or week), and all of these sources would be operating the system of paying HMRC the gross amount of cost to them.
Sources such as -

* Other employments
* State Pension
* Private Pensions
* Benefits
* Savings and other sources of investment income
* etc

HMRC would then calculate the taxes and other deductions for each individual person using a big multi department payroll system and, (the real selling point) calculate the benefits that people were entitled to for that period based on all of this information available, so that no one was overpaid benefits. Finally, HMRC would make one payment to each person's bank account being the net amount due to them for the week/month/period as calculated by their massive payroll system.

In theory this is a great idea but totally unworkable for zillions of reasons, but that was the original idea. All we have left is this incredible idea is submissions from payroll systems each week/month which the payroll produces anyway. The vast majority of the RTI project has been quietly forgotten as unworkable.

MTD is a similar fantastic (i.e. fantasy) idea where perhaps the easier parts might survive, but the vast majority of the project will also be forgotten as being unworkable and for the most part, unnecessary anyway.

Goodbye MTD

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Replying to philaccountant:
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By DMBAcc
21st Dec 2022 11:56

Phil, it is already happening in China. Also look at Greece when bank accounts were top-sliced for a so called "wealth tax".

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Replying to RickyRoark:
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By Postingcomments
21st Dec 2022 12:34

The usual replies of "It's inevitable, so we may as well lie down and comply because it's more convenient that way"

Ray McCann will be along soon to tell you to "Get a grip" - thinking that is an effective phrase for crushing dissent without any explanation. Maybe it was in the 50s or whenever he was young.

Or people could say "no". We have all the power really - but is it spread thin over millions of people, most of who don't understand much and too many of those who do are weak people who do what they are told (incl a lot of accountants, I'm sad to say).

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Replying to RickyRoark:
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By Ermintrude
22nd Dec 2022 09:15

Off topic, but what does "get in the sea" mean?
(It was yelled by protesters at a rally I attended a few months back)

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By SteveHa
21st Dec 2022 09:53

Quote:
The minister, Victoria Atkins, made no mention of quarterly reporting in her written statement, so we must assume that this aspect of MTD reporting will remain in place. 

HMRC email yesterday;

"from April‌‌‌ ‌‌2026, self-employed individuals and landlords with an income of more than £50,000 will be required (mandated) to keep digital records and provide quarterly updates on their income and expenditure to HMRC through MTD-compatible software"

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Replying to SteveHa:
Tornado
By Tornado
21st Dec 2022 10:15

That may be what is says, but we all know that quarterly reporting will be clumsy and unworkable and I cannot see it as being mandated in the end. There is just no point to it.

The MTD can keeps getting kicked down the road with little bits being scraped off with every kick, until all that will be left is the ring pull which will just get washed down the drain and never be seen again.

Goodbye MTD

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By Self-Employed and Happy
21st Dec 2022 10:07

"Why is Quarterly Reporting needed?"

It isn't, the whole premise of MTD ITSA is that the 4 quarterly reports could be filed inaccurately and then it's all tidied up by a final 5th submission.

Therefore Government saying they'd use the quarterly reporting in their calculations is astonishing as it won't be finalised information.

It's a [***] show that needs scrapping for anyone who isn't VAT registered.

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By petestar1969
21st Dec 2022 10:14

When HMRC say the quarterly reports aren't a forerunner for quarterly tax payments, I don't believe them.

Its my view that HMRC and HMG want as many people as possible on PAYE so they get their money monthly.

I'm surprised there aren't yet moves to effectively ban being a sole trader.

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Replying to petestar1969:
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By dstickl
21st Dec 2022 10:25

Surely the vogue for multiculturalism and diversity in business necessitates the survival of sole traders, and self-employed people.
Aren't those business sectors where economic growth - so urgently needed by HMG - may very well come from !

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Replying to dstickl:
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By petestar1969
21st Dec 2022 11:03

Hmm..

I reckon HMRC et al want such businesses to be limited companies paying everyone including the owner through the PAYE system. Isn't that what they were really trying to do with IR35?

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Replying to petestar1969:
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By dstickl
21st Dec 2022 11:33

Well now, my answer is:
HMT / HMRC really has to choose between:
(A) PAYE being universal, or
(B) Economic growth encouraged from and by sole traders and/or self employed people,
OR
... there might be voter pressures ...

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Replying to dstickl:
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By DMBAcc
21st Dec 2022 12:04

Whatever happens there will always be small businesses. With increasing Gov't interference more and more of these businesses will go underground using cash or a barter system. It is already happening in some parts of the country to a greater or lesser extent. As the £ sterling becomes ever more worthless so more bartering will arise. Not to mention of course that places like Cornwall have a history of "running the gauntlet" with customs officials of a bygone era. It's not difficult to see this returning as government becomes more authoritarian. I'm so glad that I have lived my life in a so-called "Liberal Democracy" whatever that means. I'm nearing the end of my stay here on this planet but I do fear for my children and grandchildren.

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