MTD for ITSA – more questions than answers

MTD for ITSA – more questions than answers

ATT technical officer, Emma Rawson, takes a look at recently published draft MTD for ITSA tertiary legislation, highlighting some key areas where taxpayers and agents are still in the dark

MTD for ITSA – more questions than answers

Earlier this summer, HMRC published draft notices regarding MTD for Income Tax Self-Assessment (MTD for ITSA) for a short, four week consultation.

Whilst these provide some helpful insights into how MTD for ITSA might work in practice, it is hard not to feel disappointed at how light on detail they are, especially as we’ve been waiting for them for quite some time (it’s now over 10 months since the legislation underpinning them was laid).

Right now, it feels as if they leave us with as many questions as answers.

What do the notices tell us?

The draft notices cover four areas:

  • Requirements for functional compatible software.
  • Information to be included in quarterly updates.
  • Information to be included in the End of Period Statement (EOPS).
  • Simplified record keeping for retailers.

The first of these confirms that ‘digital links’ must be used for any transfer of data between software programmes, but does not address what this actually means in practice. There is a need for clear, practical guidance here, including the exact point at which the requirement for digital links starts and how data can be transferred between agents and clients in a compliant manner. The notices are also silent as to whether any form of soft landing will be offered for MTD for ITSA digital links (as was the case for VAT), or whether there will be similar relaxations of digital record keeping requirements, for example for amounts received by third party agents.

The quarterly update and EOPS information comprises lists of categories copied across from the relevant Self-Assessment return pages for property and trading income. Whilst this is a good starting point, as many of the categories will already be familiar to taxpayers and agents, it does result in some confusion. For example, HMRC have previously said that tax and accounting adjustments will be optional, but not required, in quarterly updates.

However, the notices do not appear to allow for these adjustments to be made in the majority of cases, whilst at the same time specifically requiring some information to be provided that appears to relate solely to accounting adjustments (such as depreciation and bad debts). The notices are also silent on what basis – cash or accruals – information has to be provided.

One thing the notices do confirm, which may come as a surprise, is that businesses below the VAT threshold will be allowed to file simplified quarterly updates and EOPS, giving a total of their income and expenses, without the requirement to split these by category (similar to the existing ‘three-line accounting’). Whilst this is a welcome simplification in principle, especially for the very smallest businesses, it will limit the usefulness of the information made available to HMRC and potentially in turn the support which can be given to taxpayers. There are also practical questions to be ironed out, for example whether the relaxation extends to digital record keeping, and how and when the VAT threshold test should be applied.

Finally, the relaxation for retailers appears pragmatic, but further guidance will be needed as to how the phrases ‘retailer’ and ‘retail sales’ are to be interpreted, especially for those businesses who have a variety of different revenue streams.

What do the notices not address?

There are a number of important areas on which the notices are silent.

For example, nothing is said about how the EOPS will interact with the ‘final declaration’, which is the last stage of the MTD process and will bring in all non-MTD sources of income and finalise a taxpayer’s liability for the year. It is not clear how this will work in practice, or at which stage specific reliefs will need to be claimed.

More information is also needed on MTD filing requirements for property businesses. The quarterly update and EOPS information schedules for these are split into four categories – UK property, overseas property, UK Furnished Holiday Lets (FHLs) and EEA FHLs.

It’s not clear whether separate filings will be required for each of these and, if so, how common expenses spanning more than one (for example insurance) should be dealt with. How record keeping and reporting will work for jointly owned property is not addressed at all in the notices, and remains a particular area of concern.

What next?

The consultation closed on July 28, with the ATT submitting a detailed response.  We are expecting final versions of the notices to be published this autumn.

With MTD for ITSA due to be mandated from April 2024, and HMRC looking to scale up their pilot in the coming year, it is worrying that such a large number of questions remain unanswered. Further guidance is expected to be published later this year, and it is hoped that this will cast further light on what will be expected of both taxpayers and agents.

Resources & Whitepapers

Why Professional Services Firms Should Ditch Folders and Embrace Metadata

Professional Services Why Professional Services Firms Should Ditch Folders and Embrace Metadata

2y

Why Professional Services Firms Should Ditch Folde...

In the past decade, the professional services industry has transformed significantly. Digital disruptions, increased competition, and changing market ...

View resource
2 Vital keys to Remaining Competitive for Professional Services Firms

2 Vital keys to Remaining Competitive for Professional Services Firms

2y

2 Vital keys to Remaining Competitive for Professi...

In recent months, professional services firms are facing more pressure than ever to deliver value to clients. Often, clients look at the firms own inf...

View resource
Turn Accounts Payable into a value-engine

Accounting Firms Turn Accounts Payable into a value-engine

2y

Turn Accounts Payable into a value-engine

In a world of instant results and automated workloads, the potential for AP to drive insights and transform results is enormous. But, if you’re still ...

View resource
Digital Links: A guide to MTD in 2021

Making Tax Digital Digital Links: A guide to MTD in 2021

2y

Digital Links: A guide to MTD in 2021

The first phase of Making Tax Digital (MTD) saw the requirement for the digital submission of the VAT Return using compliant software. That’s now behi...

View resource