MTD ITSA: Why quarterly updates are neededby
Many people are asking why taxpayers will be required to submit quarter updates under MTD ITSA, Rebecca Cave has uncovered some of the reasons.
There are three official reasons for requiring taxpayers with annual turnover as low as £10,001 per year to provide figures of income and expenses via MTD-compatible software to HMRC on a quarterly basis.
1. Prove of homework
Submitting a quarterly update via MTD software proves the taxpayer is keeping digital business records in a timely fashion.
It actually does nothing of the sort, as regulation 5 of the MTD ITSA regulations (SI 2021/ 1076) only requires the taxpayer to record their transactions digitally by no later than:
- the quarterly filing deadline; and
- immediately before the quarterly update is submitted to HMRC.
If the taxpayer, or their accountant, enters all the transaction data for the quarter into the MTD compatible software in one exercise, just before the submission of that data to HMRC, they would be within the letter of the MTD ITSA regulations.
2. Tax estimates
The profit reported in the quarterly update will be used by HMRC to provide an estimate the amount of tax the trader will have to pay for the entire tax year. This estimate will be reflected back to the taxpayer in their online personal tax account. Apparently this will allow the taxpayer to budget for the tax due and help them pay the right amount of tax on time.
If the taxpayer draws up their accounts on a cash basis to the tax year end, the quarterly profit figures may deliver a reasonable estimate of the tax due for the entire year.
Where the accounting period does not match the tax year, the quarterly updates will not produce a meaningful estimate of the tax liability for the current year. However, if the proposed change to the tax year basis is pushed through for all unincorporated businesses, the profits reported in the quarterly updates will approximate to the total taxable profits for the year and the estimated tax liability will make some sense.
HMRC has assured the accounting bodies that MTD ITSA is not introduced to facilitate earlier payment of tax. However, the call for evidence: timely payment published in March 2021 did explore the possibilities of more frequent, in-year tax calculation and payment. The quarterly update, and resulting tax estimate, would build a path way to permit earlier payment of tax.
3. Useful data
The data HMRC receives from the quarterly updates will be used by the government to make macro decisions about the state of the economy. Also as the MTD project matures the quarterly data may also be used by HMRC to create informed interventions to help individual taxpayers pay the right amount of tax. For example HMRC will be able to see if a taxpayer has unusually high expenses in a category not expected for their trade.
As many others have commentated, if MTD ITSA had been in place before the Covid-19 pandemic, HMRC would have been able to provide more targeted help to the self-employed based on their income reported in near real time.
4. Late filing penalties
There is a fourth reason that HMRC is less keen to shout about for MTD ITSA, and that is the value of penalties that will be levied on taxpayers who fail to submit their MTD submissions on time.
A new late filing penalty regime will be introduced for taxpayers who are mandated into MTD ITSA from April 2024. All other taxpayers within self-assessment will be drawn within the new penalty regime from 6 April 2025. For VAT this new penalty regime starts two years earlier on 1 April 2022 when all VAT registered traders are mandated into MTD.
Points build to penalties
A taxpayer will be subject to a financial penalty for late filing of an MTD submission once they have accrued sufficient points for late filing of other submissions relating to the same tax. The taxpayer accrues separate penalty totals for VAT and income tax, which do not affect each other, but are based on the same rules.
The points threshold depends on the submission frequency:
|Submission frequency||Penalty threshold||Period of compliance|
|Annual||2 points||24 months|
|Quarterly||4 points||12 months|
|Monthly||5 points||6 months|
MTD ITSA also requires two annual reports: the end of period statement (EOPS) and the finalisation declaration, which replaces the SA tax return. If the taxpayer is late with those two annual reports, they will have breached the threshold for the annual submissions and be subject to a £200 penalty.
Wiping the slate
Each point levied will expire after two years, and this lifetime clock starts running from the month after the month in which the late filing occurred, not the month when HMRC tells the taxpayer the point has been levied. HMRC has 11 weeks to levy points after the quarterly filing deadline is missed, and 48 weeks for annual filings.
The points slate can only be wiped clean when the taxpayer achieves both of:
- No late submissions for a period of compliance; and
- All returns filed for the previous 24 months, even if they have been filed late.
The period of compliance varies with the submission frequency of the return as shown in the table above.
All points and penalties can be appealed.
Example 1: George the landlord
George receives £18,000 of rental income a year. He is unaware that he has to file quarterly updates under MTD ITSA, as all the advertising he has seen refers to small businesses. George doesn’t run a business, and he doesn’t have an accountant or a computer. He files his tax return on paper every year in October.
George will rack up the following penalties for late filing of MTD returns:
|MTD submission required||Due date||Points/Penalty|
|Q1: to 5 July 2024||5 August 2024||1 point|
|Q2: to 5 Oct 2024||5 Nov 2024||1 point|
|Q3: to 5 Jan 2025||5 Feb 2025||1 point|
|Q4: to 5 April 2025||5 May 2025||1 point and £200|
|Q1: to 5 July 2025||5 August 2025||£200|
|Q2: to 5 Oct 2025||5 Nov 2025||£200|
|EOPS: 2024/25||31 Jan 2026||£200|
|Final declaration:2024/25||31 Jan 2026||£200|
Example 2: Shona is self-employed
Shona is aware that she needs to file quarterly updates under MTD ITSA, but she misses the first update deadline as it falls Bank Holiday Monday where she lives in Scotland. She files the next two updates on time, but in April 2025 Shona is taken ill and has to cease working for nine months. She files the next three quarterly updates late on 30 January 2026.
Shona’s penalty profile will be:
|MTD submission||Due date||Date filed||Points/Penalty|
|Q1: to 5 July 2024||5 Aug 2024||7 Aug 2024||1 point|
|Q2: to 5 Oct 2024||5 Nov 2024||5 Nov 2024|
|Q3: to 5 Jan 2025||5 Feb 2025||5 Feb 2024|
|Q4: to 5 April 2025||5 May 2025||30 Jan 2026||1 point|
|Q1: to 5 July 2025||5 Aug 2025||30 Jan 2026||1 point|
|Q2: to 5 Oct 2025||5 Nov 2025||30 Jan 2026||1 point and £200|
|EOPS: 2024/25||31 Jan 2026||30 Jan 2026|
|Final declaration:2024/25||31 Jan 2026||30 Jan 2026|
Shona may be able to prove she has a reasonable excuse for the late filing of three quarterly updates in January 2026, and if HMRC accepts that excuse three points and the penalty will be removed.
However, the first point from August 2024 hangs on Shona’s slate until September 2026, when it will expire if she has filed all the MTD submissions due in that two year period, and she hasn’t made any late submissions for 12 months.