Four million taxpayers will need to submit quarterly plus end of period reports for each trade and property business, leading to multiple submissions for different periods under MTD for income tax.
MTD for income tax has now morphed into MTD for income tax self-assessment (ITSA), and HMRC are now referring to the regime as ‘MTD ITSA’.
HMRC estimates there are four million businesses that pay income tax, but who are not VAT registered, so they are not already keeping digital business records. All of these businesses need to enter the MTD ITSA regime from April 2023 (see start dates below).
What reports are required?
For each trading or property business the taxpayer operates they will have to submit a quarterly report of income and expenses in defined categories. The taxpayer will also have to submit an end of period statement (EOPS) for each of those businesses (the fifth report).
The MTD ITSA regime will incorporate all of the reporting required on the current SA tax return into a ‘finalisation’ or ‘crystallisation’ statement. This statement will bring together all of the information included in the MTD reports, plus other taxable income (such as investment and employment) to calculate the tax liability for the tax year.
The draft MTD ITSA regulations (see developer hub policy update) indicate that individual landlords must submit separate quarterly updates for each category of property business (eg long term letting, FHL, overseas lettings).
All property businesses must use the tax year as the accounting basis period, but trades can use any accounting period. The quarterly reports are due exactly one month from the end of each of the quarter, which contrasts with one month and seven days after the end of the quarter for VAT.
The EPOS and the finalisation statement are both due by 31 January after the tax year end.
Shaun is a self-employed builder who makes up his accounts to 30 April, and his VAT returns are submitted for the quarters to the end of April, July, October and January. He also lets two residential properties, one as furnished holiday accommodation (FHL) and the other as a long term let.
Shaun’s pattern of MTD reporting will be:
|Month||Property businesses: 5 April year||VAT returns||Building trade: 30 April year end||EOPS and year end finalisation|
|January||31 Jan x 3 EPOS31 Jan: Finalisation|
|February||5 Feb x 2||28 Feb|
|May||5 May x 2||31 May|
|August||5 August x 2||31 August|
|November||5 Nov x 2||30 Nov|
Shaun needs to submit a quarterly MTD report for each of his property businesses and his building trade, an EOPS for each of those businesses, four VAT returns and a finalisation statement – a total of 20 reports to HMRC for each tax year.
The mandation dates for MTD ITSA were announced in July 2020 and will be follows:
- Existing property income: 6 April 2023
- Existing trading income: first accounting period starting on or after 6 April 2023
- New property business: 6 April following the start date
- New trade: start of accounting period in year three
Individuals who have a combined gross income from all trades and letting businesses in excess of £10,000 per year are within scope of MTD ITSA. These people may not be liable to pay any income tax as the entry test is based on gross income not net, and the personal allowance will cover small profits up to at least £12,570.
Jade lets her first investment property from 1 June 2023, and also starts a new trade as a self-employed diving instructor from 1 May 2023, making up accounts to 30 April. She will have to come within the MTD ITSA regime from these dates:
- Property business: from 6 April 2024
- Self-employed trade: from 1 May 2025
Combinations and mismatches
If Shaun in Example 1 uses the same accounting/MTD-compatible software for all of his property businesses and his building trade, that smart software may combine some of his MTD reports into a single submission. For example, his quarterly reports for his property businesses may be submitted together and all three EOPS may be delivered in one action.
HMRC intends to give businesses some flexibility to align their quarterly reporting periods, but this point is still being debated between the professional bodies and HMRC. The quarterly periods must be matched to the accounting basis periods.
It is clear that some simplification of the tax rules for accounting basis periods is required to make the implementation of MTD run smoothly for small businesses and landlords. The ICAEW has called for this in its Budget representations.
Change the tax year
ICAEW has also asked that the tax year end be changed to align with the end of a calendar month. Moving the year end back from 5 April to 31 March would be easiest to achieve.
However, Anita Monteith has argued more boldly in the FT that the UK should follow the Irish example and change its tax year to the calendar year, to make it more competitive internationally. The Republic of Ireland changed to a 31 December tax year end in 2002 when it joined the Euro.