MTD ITSA tax calculator is cause for concernby
The latest instalment in the Making Tax Digital for income tax self assessment saga sees concerns raised over the new tax calculator and what the self in self assessment really means.
The topic at the heart of the most recent Making Tax Digital (MTD) co-creation meeting between HMRC and software developers was the MTD for income tax self assessment (ITSA) tax calculator. This will be embedded into MTD-compliant software and will eventually replace the existing self assessment (SA) calculator, with enhanced functionality. Additional features will include greater pre-population of data held by HMRC, for example Construction Industry Scheme (CIS) deductions, and in-year forecasts of the annual tax liability based on data provided to date.
As well as in-year estimates, MTD-compliant software will also produce an end-of-period (EOP) statement, which will finalise the figures, make all necessary adjustments, apply reliefs if appropriate and compute the final tax liability figures. This is analogous with the current SA calculator, even though HMRC has said that the new version will be more agile, enabling bugs and errors to be fixed more quickly.
Sense of self
The tax calculator is the latest element of the MTD ITSA project to raise concerns among the tax community, with AccountingWEB’s former tax editor Rebecca Cave musing, “If HMRC performs the MTD tax calculation – what has happened to the concept of self assessment?”
On a purely semantic level the question holds some merit. After all, what is meant by “self” if the calculation is carried out by software? Of course in reality most taxpayers and agents already rely on the current SA calculator for the final figures and the calculation of the tax is only one part of the SA concept. The taxpayer will still be required to input most of the details of income, expenses and reliefs, although the MTD version of the calculator will automatically input more data held by HMRC than the current system.
As long as the calculator spits out correct figures there should be no cause for concern. But what if it doesn’t?
It has not been made clear thus far what the process will be if a taxpayer disagrees with the calculation provided by the software. Nor do we have concrete information from HMRC on whether, if the MTD calculation is incorrect, the taxpayer will be liable for penalties.
Rebecca Cave put this very question to HMRC over a year ago in September 2022 and the answer seemed to skirt around the issue. HMRC’s answer was: “The customer is liable for any penalties for any incorrect submissions, but the usual appeal procedures will still apply. HMRC will provide the customer with a calculation of their income tax liability based on the information the customer has provided about their taxable income.”
Ironing out the creases
The creation of a new tax calculator is a chance for HMRC to iron out errors in the current calculator. Because it has always been the case that the coded tax calculator cannot cover correctly every conceivable circumstance, HMRC publishes periodically a list of exclusions [document downloads]. These are known errors within the existing SA calculator, which will result in allowances or reliefs being incorrectly dealt with in the final figures.
The current list is long, at seven pages for tax year 2022/23, and HMRC has a golden opportunity in the development process to eliminate all existing known exclusions in the new calculator.
Corrective process unclear
The instruction for taxpayers within one of the published exclusions is that they must file a paper return. This is important because, although it is possible in some software to overwrite the tax calculation when submitting the SA online it would result in the return being rejected as it would not agree to the (incorrect) calculation in the HMRC system. If the return is filed on paper, HMRC has to process it manually.
The big question around the MTD ITSA tax calculator is whether a similar corrective process will be implemented and what that will look like. With HMRC maintaining that the liability for accurate returns will remain with the individual, this is a point on which urgent clarification is needed.
Another very valid concern raised by Rebecca is around the identification of errors within the calculator. Who, she asks, checks that the MTD calculator is producing the correct result and is following tax law correctly, for example applying top-slicing relief correctly?
The current process, in a nutshell, is that software developers are sent the coding that feeds the SA calculator into their software product. The code replicates an Excel spreadsheet, known as the “test case generator” which is also sent to developers. This enables them to test that their implementation of the code concurs with HMRC’s, which is vital to ensure the returns submitted via their software will not be rejected.
Access to the Excel spreadsheet serves another function, to which Rebecca is referring. It provides an opportunity for those with the time, inclination and expertise to examine HMRC’s calculations with a fine-toothed comb and it is during this process that several of the errors on the exclusions list are picked up.
Recent examples are incorrect allocation of personal allowances and, more recently, the erroneous calculation of top-slicing relief, both discovered by Tim Good of Absolute Tax Limited.
But should it really be the responsibility of tax experts outside of HMRC to examine the calculations? As Rebecca puts it: “If it wasn’t for people like Tim Good, who take it upon themselves to check HMRC’s homework, we would be none the wiser about the mistakes it contains.” Her view is that there should be a statutory standards body whose purpose it is to check the calculations.
In the meantime though, it is vitally important that HMRC continues to share the underlying calculations when taxpayers are migrated from the current SA calculator to the new MTD ITSA version. What format this may take remains to be seen.
Full steam ahead
It seems almost certain that the Chancellor will provide an update in his Autumn Statement on when, if at all, MTD ITSA will be implemented. With the project perpetually plagued by delays, setbacks and faith in its success rapidly dwindling some readers may be holding onto hope that the whole concept will be put to bed.
However, it is clear that HMRC is absolutely committed to re-platforming on a new enterprise architecture system. With countless hours and millions of taxpayer pounds already ploughed into the project it’s safe to say that, unlike the HS2 northern branch, it is still full steam ahead for MTD ITSA.
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Consulting Tax Editor for AccountingWEB.
I have spent the last 10 years teaching the accountants of the future, mainly ICAEW advanced level corporate reporting. I also cover tax news and write and edit tax updates for other publishers including PTP Limited.