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Lobster hanging from a trap before being dropped back into the sea. One claw gripping the wire. AccountingWEB MTD ITSA: Three-year lock-in rule in doubt
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MTD ITSA: Three-year lock-in rule in doubt

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HMRC is discussing with stakeholders how the MTD ITSA regulations can be redrafted, so businesses aren’t forced to report quarterly for three years after their turnover drops below the exit threshold. 

18th Aug 2023
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The regulations which set out the rules for complying with MTD ITSA (2021/ 1076) were published in 2021 and they haven’t been updated following the minister’s announcement on 19 December 2022 that the start date for MTD ITSA mandation would be pushed back to at least April 2026.

Alongside that delay it was revealed that the turnover threshold for businesses to be mandated into MTD ITSA would be increased to £50,000, with a proposal that this would drop to £30,000 from 6 April 2027. This entry turnover threshold is currently set at £10,000 or more in MTD ITSA reg 21.

The government also committed to carrying out a review of the needs of small businesses that have turnovers under £30,000, before making any further decisions to roll-out MTD ITSA to those smaller businesses. We expect a Treasury minister to announce the outcome of this review in the autumn.      

First three years

HMRC will look at the turnover reported on the last tax return submitted before the start of the current tax year, to determine whether MTD ITSA reporting is required for that year.

As set out in the MTD ITSA: Get the basics right article, a new business will typically start reporting under MTD ITSA from the third tax year it is in existence.

Example

Mary commences her business on 1 September 2024 and has turnover of £30,000 in the year to 5 April 2025. She reports this first period of trading on her 2024/25 tax return submitted by 31 January 2026. Although the MTD entry threshold will be £50,000 for 2026/27 (assuming the regulations are amended), that threshold is reduced proportionally for the period of trading which is seven months for 2024/25, ie, £29,166. Mary is thus required to report under MTD ITSA from 6 April 2026.  

Last three years

When a business ceases to trade and it has no turnover in the tax year, the taxpayer is not required to report under MTD ITSA for a year where there is nil turnover.

However, if the business turnover reduces while it continues to trade, and the taxpayer has been required to report digitally under MTD ITSA for each of the previous three tax years, they must continue to submit MTD ITSA reports until their reported qualifying income does not exceed £10,000 (MTD ITSA reg 22 ), for three complete tax years.

Lobster pot threshold

The current MTD ITSA regulations do not tie this exit threshold of £10,000 ( MTD ITSA reg 22), to the previous MTD entry threshold of £10,000 (MTD ITSA reg 21). It will be up to the government to either alter one or both of these turnover thresholds in reg 21 and reg 22 in line with the Minister’s statement on 19 December 2022.

Without some alteration of the exit rules, the MTD ITSA regulations will turn into a lobster pot for small businesses in that they will be trapped inside until their turnover diminishes to practically nothing.

Review underway

We understand that HMRC is looking at this policy of requiring the taxpayer to report very small levels of turnover as part of a wider review of the existing MTD ITSA regulations.  

The professional bodies including the Chartered Institute of Taxation (CIOT), the Low Incomes Tax Reform Group (LITRG) and other stakeholders, are exploring the difficulties that this low exit threshold and the three-year lock in rule could create for taxpayers.

If you have ideas for possible alternative mechanisms for exiting MTD ITSA once the regime applies to a business, please include them below. 

Replies (31)

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By tom123
18th Aug 2023 11:17

I love the lobster pot metaphor

Thanks (2)
Replying to tom123:
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By richard thomas
18th Aug 2023 12:14

So do I, but the lobster in the photo seems to have managed to escape. I thought initially the photo was a typical AWeb visual pun about MTD for ITSA hanging onto life by the tips of its claws.

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Replying to richard thomas:
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By mumpin
21st Aug 2023 10:01

Its also been boiled.
When they come out of the sea they are BMW metallic blue...

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By rockallj
18th Aug 2023 12:54

I have an easier solution……..

Scrap MTD ITSA and just require quarterly payments as a minimum.

Thanks (16)
Replying to rockallj:
Tornado
By Tornado
18th Aug 2023 13:05

rockallj wrote:

I have an easier solution……..

Scrap MTD ITSA and just require quarterly payments as a minimum.

I have an even better idea, scrap MTD ITSA and leave things as they are now :-)

Thanks (26)
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By AdamJones82
18th Aug 2023 12:54

When will they stop wasting time and resources on this vanity project between themselves and software vendors?
The dead horse has been flogged so much even the bones are crumbling.
Put the time and money into CURRENT systems to have them of some use. I got a reply to a letter last week, my letter was sent August 2022.

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Replying to AdamJones82:
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By LAMBERTCLERICAL
21st Aug 2023 10:11

Fully agree! 7 months to respond is horrendous. In my case, the 7-month wait was for a VAT registration. Luckily, the client was in the reverse-charge regime, but could have been so much more of a nightmare. Until HMRC can deal efficiently with CURRENT legislation, they should postpone any new changes.

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Replying to LAMBERTCLERICAL:
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By AdamJones82
21st Aug 2023 15:47

By contrast I recently had to deal with the Eire tax authority for a client.
I was able to email them (something HMRC STILL can't accept) and got a reply the same day!

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Replying to AdamJones82:
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By Mr J Andrews
22nd Aug 2023 10:18

Spot on Adam.
HMRC in discussions with stakeholders indeed. The stakeholders are of course the software industry - the ONLY party with a vested interest in this nonsense.
A cynic might think some backhanders in play here.

Thanks (3)
Replying to Mr J Andrews:
Morph
By kevinringer
22nd Aug 2023 10:26

Mr J Andrews wrote:

A cynic might think some backhanders in play here.


I hope HMRC are indeed getting a back-hander from the software industry because otherwise HMRC will get nothing out of MTD and end up spending a 7-figure sum on this when the only beneficiaries are the software industry.
Thanks (1)
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By Hugo Fair
18th Aug 2023 13:08

Any solution will depend, as always, on first getting clarity on (a) the objective and (b) the priorities of the various stakeholders.

For instance:
- eliminating unnecessary (for taxpayers) and unproductive (for HMRC) admin; vs
- facilitating automation (for HMRC) of the generation of penalties/fines; vs
- hitting the new deadlines even if software developers haven't had time to retro-fit another change;
(and there are others)!

Why are HMRC still clinging to the weird concept of seeking solutions to unquantified problems and with an unspecified objective?

Thanks (19)
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By GHarr497688
18th Aug 2023 13:26

Why are they carrying on with this misery and spending even more money confusing people.
Get back on the ground looking at what people are doing and stop the nonsense now. No one want this system and The Government just won't let go.

Thanks (17)
Replying to GHarr497688:
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By Moo
21st Aug 2023 10:22

'and The Government just won't let go'
And there lies the rub - hopefully a different Government will be more amenable to listening to the tax professionals about tax rather than falling for the delusions of HMRC top brass and sales tactics of the software industry.
We need to be reaching out to Labour now about the nonsense of MTD and dysfunctional HMRC.

Thanks (5)
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By Hugo Fair
18th Aug 2023 18:59

"If you have ideas for possible alternative mechanisms for exiting MTD ITSA once the regime applies to a business, please include them below" ...
... well, despite my earlier point (about needing a specification if an appropriate solution is sought), here's a lateral thought:

* take an SA-alike approach (in other words force the taxpayer to make the assessment - and then leave HMRC to do the only thing they seem capable of (fining those, later on, they find to have had a loose affiliation with the concept of truth).

So provide an online form via which anyone registered for MTD can de-register themselves by selecting one of the valid reasons for doing so.
Warn of the penalties which will be levied if, when checked by HMRC in 12 months' time, it turns out that the 'reason' was inaccurate or didn't come to pass.

-> Taxpayer is responsible for decision and decides on the desirability or not of the risk factor;
-> HMRC gets a predefined pool to trawl which either proves that this approach works or generates a bundle of extra revenue.

I'd prefer for MTD to get lost before it reaches the departure gate - but as a purely conceptual idea ...

Thanks (11)
Replying to Hugo Fair:
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By GHarr497688
20th Aug 2023 22:01

I would say standards of book-keeping will be much worse on MTD as the user is limited on to correct errors and so will leave the mistake. HMRC never learn.

Thanks (13)
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By Refs1
20th Aug 2023 17:02

More nonsense about MTD.

I just don’t get what they are trying to achieve. All they need to do is answer the phone!

Not rocket science!

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By Self-Employed and Happy
21st Aug 2023 09:39

Not one person wants this, keep MTD for all businesses above £85k VAT threshold.

Also with the increasing costs the £85k threshold needs moving upwards a fair bit, I've had a few businesses that for a few years have really supressed their sales (opening hours etc) so they don't have to go VAT registered, the current threshold is a real disincentive for growth in many sectors, particularly health and beauty.

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Replying to Self-Employed and Happy:
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By unclejoe
21st Aug 2023 09:59

And there is a real incentive for small traders to do business on a cash "nudge, nudge, wink, wink, say no more" basis. Or to limit their activities and claim some state benefit. How can this be good for the economy?

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Replying to Self-Employed and Happy:
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By petestar1969
21st Aug 2023 11:19

Hmm as unclejoe has already said, those businesses with turnover below the VAT threshold are the very targets of MTD, as they are the ones most likely to be suppressing turnover and profits as well as claiming benefits they shouldn't.

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Replying to petestar1969:
Morph
By kevinringer
21st Aug 2023 11:31

They may well be, but MTD ITSA isn't going to fix this, it's going to increase the cost of compliance for the sub-£85k businesses and push them underground. I recall this point being raised way back in 2015 and HMRC admitted their "research" had indicated an increase in businesses going underground. I don't recall whether anything official was published. Back then, HMRC reckoned the cost to businesses of complying with MTD would be smaller than SA, then gradually over the years HMRC admitted the cost saving wouldn't be as much as HMRC first thought, then there wouldn't be a cost saving, then MTD would cost more, and so on... which means HMRC probably also underestimated the number of businesses going underground.

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Replying to kevinringer:
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By johnjenkins
23rd Aug 2023 13:01

I have always said that the grounds for MTD that HMRC first "put out" have all been disproved. So there is no point in MTD at all. Accountants know it, business know it and I suspect most of HMRC know it.

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Replying to petestar1969:
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By Sue Murby
22nd Aug 2023 14:04

My client list comprises mainly artists/artisans. None of them (hand on heart) suppress their turnover. Only a handful are above the VAT threshold. I suspect that many of them would be very happy if their turnover approached the VAT threshold.

Thanks (1)
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By Alanpryan
21st Aug 2023 09:49

Please, just make it stop...!

Thanks (4)
Morph
By kevinringer
21st Aug 2023 09:50

MTD ITSA is dead, so why are they discussing it at all? The sooner HMRC wakes up to this, the sooner HMRC can put the resources into fixing existing IT problems.

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By petestar1969
21st Aug 2023 11:12

.

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Michael Bennett, Owner of Michael B Bennett Ltd
By Michael Bennett
21st Aug 2023 14:03

Easy solution. Scrap MTD completely as, in its current format, it serves no practical purpose.

Thanks (7)
Replying to Michael B Bennett:
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By GHarr497688
21st Aug 2023 14:45

approaching 10 years and the sad saga carries on. How do HMRC get away with it ?

Thanks (5)
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By SkyBlue22
21st Aug 2023 14:16

I swear everytime we hear an update about this is gets even more convoluted.

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Replying to SkyBlue22:
By Silver Birch Accts
22nd Aug 2023 14:38

Convoluted is the exact description, the more convoluted it gets the lees clients will understand. That cannot be right, just keep it simple and efficient so everybody has a chance of understand the taxation system that underpins the amount of tax paid.

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By Yossarian
21st Aug 2023 17:19

The one person who wanted this (George Osborne), b*ggered off from his job as chancellor over 7 years ago. Why is anyone still flogging this dead horse? I presume all of those involved are too embarrassed to admit defeat considering the amount of money which has been wasted on it.

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By monkeypuzzle
22nd Dec 2023 12:16

JUST SOMEBODY, ANYBODY, MAKE IT STOP!!!!!!!!

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