by Rebecca Cave
These answers are based on the guidance produced so far by the professional bodies and HMRC, the draft legislation and consultation documents. The final regulations for MTD for income tax (MTD ITSA) will be published in the Autumn (probably in October), so we can’t be confident of how the rules will work exactly until we see those regs.
When must a business join MTD?
It is now apparent that there will be a big bang joining date for MTD ITSA on 6 April 2023 for all unincorporated businesses, whatever their current accounting period end.
Changing to a tax year basis from 2023/24 will mean that all businesses will have to report income and expenses that fall exactly into the tax year. Also, the draft legislation to bring about this change deems an accounting period ending on 31 March to be treated as ending on 5 April for tax purposes.
This combination of basis period and deeming provision means that unincorporated businesses will need to enter the MTD ITSA regime from the next accounting period starting on or after 1 April 2023. Thus businesses which draw up accounts to 31 March 2023 will join MTD ISA from 1 April 2023 not 1 April 2024.
It is possible that Treasury Ministers will be persuaded that having all unincorporated businesses joining MTD ITSA at exactly the same time, and reporting to the same quarterly deadlines, will put an impossible strain on HMRC’s systems and resources. We will have to wait and see what the final MTD regulations say when they are released.
Will the turnover threshold change?
We do not expect the turnover threshold to change in the final MTD ITSA regulations. HMRC has made it clear that all unincorporated businesses with an annual turnover exceeding £10,000 will be required to report income and expenses under MTD ITSA.
This turnover threshold takes into account income from all businesses, trades and property. A person with £6,000 of trading income and £6,000 of rental income will be required to report under MTD ITSA as their total turnover exceeds £10,000.
Will there be any deferral of start date?
Partnerships which only have individuals as partners will have to join MTD ITSA from April 2023.
However, there will be a deferral (for an undefined period) for MTD ITSA mandation for the following categories of partnership:
- Partnerships containing a corporate partner
- Limited partnerships
Will there be any exemptions?
The latest MTD ITSA policy update indicates that the following taxpayers will have full exemption from MTD ITSA:
- Trusts (including trusts with property income)
- Estates of deceased persons
- Trustees of registered pension schemes
- Non-resident companies
In addition, some individuals may be able to claim exemption from MTD ITSA on the basis that they are digitally excluded.
We do not have the HMRC guidance for MTD ITSA at this point yet, but VAT Notice 700/22 indicates that if the taxpayer can get any internet access at their home, business or to another location they will not be exempt on the basis of digital exclusion. This takes no account of the speed or reliability of the internet access.
HMRC has confirmed that there will be no easement for taxpayers attempting to comply with the MTD ITSA regulations in the first year, but a late filing penalty will not apply until four quarterly submissions have been filed late.
There is no information yet on whether penalties will apply for inaccurate quarterly submissions under MTD ITSA.
The whole system of penalties for late filing and late payment of income tax and VAT is to be revised as set out in FA 2021 ss116-118, schs 24, 25, 26. The changes impose a complex system of points that build up to a financial penalty. It is expected that this new system will be brought in alongside MTD ITSA.
What are the filing deadlines?
HMRC has confirmed that the quarterly filing deadlines for all unincorporated businesses filing under MTD ITSA will be: 5 August, 5 November, 5 February, and 5 May. Those businesses with accounting dates of 31 March or 1, 2, 3, 4 April, will also file by these deadlines, so a business with a 31 March accounting date will have 5 extra days to file.
The first mandated MTD submission for the first quarter to 5 July 2023 will have to reach HMRC by 5 August 2023, which is a Saturday in the Summer Bank Holiday weekend in Scotland.
What exactly will be submitted?
The quarterly MTD ITSA submission will consist of total sales income in the period and totals of expenses in defined categories. It is expected that those categories will be aligned with expense totals currently required for the self-employed section of the self-assessment tax return. Quarterly balance sheet statements will not be required.
Any accounting adjustments, for say capital allowances or losses, will be made on the final submission for the year – known as the end of period statement (EOPS).
How will the tax position be finalised?
The EOPS will have to be submitted by 31 January following the end of the tax year. HMRC hope that tax software providers will incorporate the EOPS into the tax software which also compiles and submits the finalisation statement.
It is the finalisation statement, that calculates the tax liability for the year, which effectively replaces the SA tax return. Any sources of income which have not been reported on the quarterly MTD submissions or EOPS is included in the finalisation statement.
Taxpayers who are not within MTD ITSA, but are currently required to submit an SA return (eg to report gains or taxable interest) will continue to submit a SA tax return.