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MTD ITSA: Why quarterly updates are needed

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Many people are asking why taxpayers will be required to submit quarter updates under MTD ITSA, Rebecca Cave has uncovered some of the reasons.

8th Oct 2021
Tax Writer Taxwriter Ltd
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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
The taxpayer will be able to submit up to three late MTD quarterly updates with no penalty, but their fourth late quarterly update will trigger an automatic £200 penalty. Every late submission after that threshold has been breached will trigger another £200 fine, but those additional penalties will not add points to the points slate (see example 1 below).

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
     
 Total penalties:   £1,000
HMRC will write to George each time he receives a penalty/penalty point and advise him how to avoid further penalties. George may be able to claim exemption from MTD ITSA on the basis that he is digitally excluded (TMA 1970, Sch A1 para 14(2) to (4)). However, he needs to know to claim that exemption from HMRC or get someone to claim it on his behalf.

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  
       
 Total penalties:     £200

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.

Replies (76)

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Replying to DaviePark:
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By johnjenkins
12th Oct 2021 10:08

What he could well do is make every business VAT registered (yes he will lose money) in order for MTD to push ahead.

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By swimmer
11th Oct 2021 17:20

Thanks for signing up to the petition. Please continue to spread the word.

The next step is to contact the newspapers. I have contacted one local, one regional and one national in the form of a letter to the Editor. They all seem very interested in the petition.

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Replying to swimmer:
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By djtax
12th Oct 2021 10:20

David Byers at the Times seems to enjoy bashing HMRC if anyone knows how to get him tuned in to this debate.

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By seitler
11th Oct 2021 21:37

£85000 for the limit is not high enough. I really don't see how MTD will help anyone

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By geoffmw1
12th Oct 2021 08:00

This is looking like big brother stuff and will also not be made as clear as Rebecca has done, to those not on Accountants Webb. Please send me everything that Rebecca has written here as a straight narrative without all the adverts so that I can print it out in a sensible form. Thank you

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By geoffmw1
12th Oct 2021 08:01

This is looking like big brother stuff and will also not be made as clear as Rebecca has done, to those not on Accountants Webb. Please send me everything that Rebecca has written here as a straight narrative without all the adverts so that I can print it out in a sensible form. Thank you

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Replying to geoffmw1:
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By Kaylee100
12th Oct 2021 08:52

Copy and Paste to a Word document?

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Replying to Kaylee100:
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By geoffmw1
13th Oct 2021 10:46

Thanks Kaylee I have done that now. When the article was on a few days ago I don't think it all ran through without advert breaks. Maybe my request made AW edit it.

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Replying to Kaylee100:
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By geoffmw1
13th Oct 2021 10:47

Thanks Kaylee I have done that now. When the article was on a few days ago I don't think it all ran through without advert breaks. Maybe my request made AW edit it.

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By AndrewV12
12th Oct 2021 10:40

oooooohhhh myyyyyy Gosssshhhhhhhhhhhhh

There may be trouble ahead.

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By GHarr497688
12th Oct 2021 14:46

I've read the rubbish and have come to the conclusion that it's best for a one man band to finish and join up with the "big boys". No small Accountants will be left if this carries on....

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Replying to GHarr497688:
paddle steamer
By DJKL
12th Oct 2021 15:09

Certainly timing taking holidays will be even more challenging than it was before.

I used to select dates where we left after the 6th of a month to allow me time to get info/lodge correct CIS returns by the 19th but returned before the next time I had to run payrolls, or I ran them all in advance and prayed no changes. I also looked at timing client vat quarters and their books.

Effectively I worked like a maniac before I left for holiday then did the same once I returned ,rather negating any holiday benefit.

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Replying to GHarr497688:
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By johnjenkins
12th Oct 2021 15:50

I've made a management decision. I'm not going to worry about anything until April 2023. All my small clients are on VT and buying a car or van goes into motor expenses (where else?). They can send quarterly updates to HMRC and I will do the normal accounts and tax computations as usual.

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Replying to GHarr497688:
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By Agutter Accounts
12th Oct 2021 15:52

In my case I think it will be time for me to retire.

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Tornado
By Tornado
13th Oct 2021 09:05

What strikes me most about MTD is that it is trying to operate in a vacuum with little or no regard to Accounting Standards and Traditional and well tried methods of calculating profits & losses, and expecting running tax liabilities to be being calculated on receipts and payments rather than the true figures that can only be prepared at end of a trading period taking into account debtors, prepayments, creditors and accruals. Also not forgetting year end decisions such as the amounts to claim for Capital Allowances and balancing charges, Annual Investment Allowance, and myriad other possible adjustments that are included before any accurate tax liability can be calculated. Indeed, some allowances are designed to be flexible to allow those in business to look at the results at the year end and claim all or nothing of their entitlements according to their situation.

It is absurd, and quite frankly unbelievable, that anyone would think that quarterly returns are going provide any sort of even remotely accurate indication of tax liabilities based on spurious quarterly Returns and it is abundantly clear that whoever has thought up this farcical idea has no idea whatsoever as to how the current Accounting and Taxation processes work and integrate.

MTD is sure to fail for an ever increasing number of reasons and the Government should hold a Public Enquiry to find out how we have even reached this stage with a very obviously flawed project.

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Replying to Tornado:
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By johnjenkins
13th Oct 2021 09:23

You and I both know that you don't need a Public Enquiry to know that quarterly updates won't work. A Public Enquiry will merely find what we have been telling HMRC and our MP's to no avail. So my thinking is that quarterly updates is a prelude to every transaction being tagged and cross checked. I can see no other reason. The three reasons HMRC gave for QU was error limitation, tax liability and proof of digitisation. All of these have been proved to be incorrect so really HMRC have nowhere to go with this.

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Replying to johnjenkins:
Tornado
By Tornado
13th Oct 2021 09:57

PUBLIC ENQUIRY

I was thinking more along the lines as to where has all the money gone that has been thrown at this Vanity Project, and what exactly has been achieved so far. We all know that there are certain areas where Public Funds are needed and can better be used than on dubious projects like MTD, so why so much allocated to this.

I felt right from the start that there were obvious beneficiaries of such a project, such as Software Developers, and was there really sufficient evidence to warrant ditching an already excellent tax administration system in Self Assessment to throw away traditional and well respected processes for something that basically did not exist to start with and no real evidence that it would work properly anyway.

We all know about the Chaos Theory except, it seems, the designers of MTD who appear to have consistently failed to recognise that a complicated system such as MTD would rely on the ability of the system to react correctly to changes elsewhere (perhaps remotely) in the system.

An obvious example is the apparent inability of the MTD to deal with partnerships and multi property owners with differing shares of profits. This is currently dealt with by Self Assessment in a logical and practical way at the end of the trading/tax year. At the moment it seems that MTD will struggle with this, and many other complex but not unusual circumstances and all for what anyway?

A Public Enquiry would hopefully get to the bottom of how this ridiculous idea ever got approved in the first place.

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Replying to Tornado:
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By johnjenkins
13th Oct 2021 10:36

As I understand it the yearly tax liability will remain. In order to compute the tax liability you have to have all the information relating to a tax year ending 5/4 or 31/3. Yes HMRC have a lot of information, including income from rentals (but not the expenses or the split, if there is one). I pride myself on being able to dissect and come up with answers but, hand on heart, I cannot see any purpose in QU. In fact I have difficulty in coming to terms with MTD as a whole because most of us are already up to scratch with some form of digitisation and the rest will natural move over in time. As you say a total waste of our money for no beneficial outcome for anyone.

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Replying to Tornado:
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By GHarr497688
13th Oct 2021 17:17

Software houses in the bedroom with HMRC thought this up - no Accountant would be that daft would they !

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By Kaylee100
13th Oct 2021 10:11

I really don't know why they have to mess with a reporting system that works. A main and worthwhile improvement would be collecting tax quicker - something that happened with SA in the 90s and could be edged even closer.

My view on that would be to change the POA system to a monthly DD system. So our software generated computations would create a payment calculation thus:

January - balance plus 1/12 POA
February to December - 1/12 POA

And a DD action/authorisation built into the electronic submission process to collect this.

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By tedbuck
13th Oct 2021 11:23

Online tax switch raises costs for small firms
Analysis by the Federation of Small Businesses (FSB) suggests an overhaul of the tax system that introduced compulsory online filing has increased costs and administrative burdens for small companies. The FSB found the average annual cost for participating businesses is £4,562, with this considerably higher than the £2,960 for those yet to migrate. Those within the Making Tax Digital system must purchase compatible software and the FSB said subscription costs may grow as the initiative is extended to cover more taxes. The FSB says that of those that have switched, 70% said costs and time lost to learning new processes has increased. Mike Cherry, national chairman of the FSB, said: “For many of those who’ve already taken the plunge, the programme has so far yielded higher costs and greater complexity.” VAT-registered businesses with taxable turnover over £85,000 are required to keep digital records and use software to submit their VAT returns, while VAT-registered businesses with a taxable turnover below the threshold will be required to follow the regime from April next year.
The Times
QED

Thanks (0)
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By tedbuck
13th Oct 2021 11:23

Online tax switch raises costs for small firms
Analysis by the Federation of Small Businesses (FSB) suggests an overhaul of the tax system that introduced compulsory online filing has increased costs and administrative burdens for small companies. The FSB found the average annual cost for participating businesses is £4,562, with this considerably higher than the £2,960 for those yet to migrate. Those within the Making Tax Digital system must purchase compatible software and the FSB said subscription costs may grow as the initiative is extended to cover more taxes. The FSB says that of those that have switched, 70% said costs and time lost to learning new processes has increased. Mike Cherry, national chairman of the FSB, said: “For many of those who’ve already taken the plunge, the programme has so far yielded higher costs and greater complexity.” VAT-registered businesses with taxable turnover over £85,000 are required to keep digital records and use software to submit their VAT returns, while VAT-registered businesses with a taxable turnover below the threshold will be required to follow the regime from April next year.
The Times
QED

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By Mr J Andrews
13th Oct 2021 16:39

Clearly this is the whole point of MTD . George & Shona . Such easy targets. And what a load of pointless points. Poor old George is being penalised for no other reason than HMRC has continually failed to put the word out, to its taxpaying customers, any snippets of information about MTD . Whilst Shona's very long illness needs to be proven - and then she is on a 2 year ''probation''. Poor girl. Another George - George Osborn started this outrageous nonsense . Another George - George Orwell who saw this coming [and who was also pursued for taxes ] ,would love it.

As for 'Tax Estimates'' and ''Useful Data'' , do you , Rebecca , really believe this Government could possibly rely upon the dubious statistical garbage now churned out by the Revenue ? All relative I suppose, when you consider £37 billion down the pan on ''Test & Trace''.

Rather than adhere to the ''NEED'' for quarterly updates as the heading suggests , the emphasis should not be in kowting to what is becoming an inept police state Tax Department but to concentrate on why quarterly reports are NOT needed. The Policy Paper published last month in respect of extending MTD for the Self Employed and Landlords [ No prizes for guessing the real reason for the extension ] specifically advised that the Govt. has been clear that if a business cannot go digital , it will not be required to do so. [ This has NEVER been made clear , but at least now admitted ].
The Govt. guidance advised certain criteria for exemption applications :-
# not reasonable or practical to use computers or the internt due to AGE, DISABILITY or LOCATION.
{The Age criteria should possibly help out at least half the nation's pensioners relying upon their property income as main source of pension. I don't suspect that HMRC will have sufficient resources to test our ageing population on their computer skills }.
# RELIGIOUS GROUNDS
So HMRC would regard a member of the Plymouth Bretheren as a fair cop out by virtue of his/her sola sciptura . But atheist George who doesn't believe in putting any financial data on computer may be penalised. Article 8 of the Human Rights Act and everyone's right for respect to one's correspondence would , I daresay , challenge this discrimination.
# It's not reasonable or practical FOR ANY OTHER REASON.
Am I alone ? It's neither reasonable nor practical for any of my clients to waste a considerable amount of their time 4 times a year on unnecessary administration - and paying extra fees for the priviledge - for no benefit to themselves.
So , being a great believer in getting my retaliation in first , it's a case of EXEMPTION APPLICATIONS at the earliest opportunity. I suggest Accounting Web followers do likewise.

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Replying to Mr J Andrews:
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By GHarr497688
13th Oct 2021 17:30

Well said

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Replying to Mr J Andrews:
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By KarlyBoag
26th Nov 2021 17:10

Yeah. Totally agree with you!!!

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By Agutter Accounts
18th Oct 2021 19:28

In other words we are required to do HMRC's work once again and provide them with ever more information, and as always the hapless taxpayer picks up the tab.

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