MTD ITSA legislation: HMRC green-lights three-line accountsby
Long-awaited draft legislation for Making Tax Digital for income tax self assessment has confirmed that those with turnover under the VAT threshold will be asked to submit just two figures to HMRC under the scheme’s new quarterly update requirements.
The document confirms that a “relevant person” with an annual turnover below the VAT registration threshold - currently frozen at £85,000 until 31 March 2024 - may choose to “provide the total of all income and the total of all expenses instead of the totals of the amounts falling within each category of transaction”.
While the decision did not meet AccountingWEB member calls for the MTD ITSA threshold to rise to £85,000, the simplification of the reporting was welcomed by the community as a ‘relief’ that will help lower-income traders comply with the new scheme. However, some members felt the draft regulations called into question the need for quarterly reporting, given HMRC would not be able to perform analysis or interrogation of the numbers on a three-line report.
"We have some important but relatively dry lists of data etc. that will need to go in quarterly updates and end of period statements," said Emma Rawson, technical officer for the Association of Tax Technicians. "Whilst it’s critical to have this, we will need to wait until HMRC publishes its guidance to get more information on how this will work in practice, in particular how tax and accounting adjustments will be handled and how everything hangs together.
"One thing which readers may welcome is the confirmation that those using ‘three-line accounts’ will be able to continue to report on these lines – ie if you are below the VAT registration threshold you can report total income and expenses (without splitting into categories) on your quarterly updates and end of period statements," continued Rawson.
Caroline Miskin, senior technical manager, digital taxation at ICAEW's Tax Faculty, commented that while the draft notices list some of the requirements, until the full guidance is revealed taxpayers, agents and software developers will be left with many unanswered questions. "In particular, the notices do not address the practicalties of reporting income from jointly held property," she said.
Miskin also reminded taxpayers and agents that there are no inaccuracy penalties associated with quarterly updates. "It's a summary of transactions, not a tax return," she added.
From a software perspective, Coconut co-founder Adam Goodall said HMRC "would be mad" not to do this. "Giving sole traders under the VAT threshold the option to submit consolidated income and expenses makes sense given they can do this under the current self assessment process already," said Goodall. "As HMRC has specified the consolidated submission on the MTD ITSA technical guidelines already, this will also bring alignment between technical specifications and governing rules - which brings welcome certainty for software providers like us."
The draft notices make it clear there are five different types of quarterly updates, depending on the type of business a taxpayer is conducting:
- Businesses with trade profits
- Businesses with property income (not UK or EEA furnished holiday lets (FHL))
- Overseas property (not EEA FHL)
- FHL in the UK
- FHL in the EEA
The draft document confirms that the MTD ITSA end-of-period statements (EOPS) will also follow the five categories above.
One point that may need further clarification is the relationship between the quarterly updates and EOPS - in particular, whether the figures need to be entered on the quarterly update submission and then entered again for the final statement. Accountants have questioned whether there will be a relationship or connection between the two - something hinted at in HMRC’s developer hub but not touched on in the draft notices.
While the draft notices don’t officially confirm this, AccountingWEB understands that the information in the quarterly updates will be effectively ‘played back’ to the agent or taxpayer when preparing the EOPS using data HMRC holds. The agent or taxpayer will then need to amend as required to get to the final taxable figures.
A related grey area is around where adjustments for disallowables must be made, and what mechanism will be used to make them. The document states: “Where a relevant person has not already decided whether the amounts included in each expense category of transaction set out in the Update Notice include any elements which are disallowable, the relevant person must remove any disallowable expenditure prior to providing the EOPS total for the relevant period.
More guidance is expected on this later in the year, but it is anticipated that all tax and accounting adjustments will be made in the EOPS - they can be made in the quarterly updates, but there is no requirement to do so. Agents or taxpayers may, however, have to amend a quarterly update if an income or expense item is missed by accident.
Retail sales and consultation period
The document clarifies the position on retail sales. Similar to the MTD VAT notice, digital records mean a single digital record of the daily gross takings for any retail sales made. The gross daily retail sales digital record must include:
- all payments as they are received by the relevant person or on the relevant person’s behalf from its own cash-paying retail consumers. This includes payments by cheque, debit or credit card, maestro, visa or similar electronic transactions and electronic cash;
- the full value of all credit or other non-cash retail sales received by the relevant person or on the relevant person’s behalf. This includes the full value of credit sales, the cash value of payment in kind for retail sales, the face value of gift, book and record vouchers received and any other payments for retail sales including those sales completed via third-party online sales platforms.
A full list of things to exclude when calculating daily gross takings is also provided, including counterfeit notes, refunds to a consumer for overcharges or faulty/unsuitable goods, and instalments in respect of credit sales.
Published on 1 July, the document is an open consultation running until 11:45pm on 28 July 2022. Although there are no formal questions accompanying the consultation, accountants and other interested parties can respond to the government via the following email address: [email protected]
AccountingWEB is also in regular contact with HMRC and the relevant tax and accountancy bodies to answer questions relating to MTD ITSA. If you have a question you’d like to answer please add it to the comments below.
Rebecca Benneyworth will cover the MTD ITSA draft notices on AccountingWEB’s Tax Talk webinar on Wednesday 6 July at 9am. For more information or to sign up please click here.