The Financial Secretary to the Treasury has announced, in a written ministerial statement, that making tax digital for income tax self assessment (MTD ITSA) will be mandatory from 6 April 2026 rather than 2024. MTD ITSA’s original start date was planned for April 2018.
Not only is the start date being deferred, it will now be introduced in phases. Self-employed individuals and landlords with a turnover over £50,000 will be mandated to join first from April 2026. HMRC estimates this will apply to 700,000 taxpayers. Those with a turnover over £30,000 will be mandated from April 2027. HMRC estimates this will apply to a further 900,000 taxpayers.
The government is now reviewing whether smaller businesses with an income below £30,000 will be mandated to join MTD ITSA. It is estimated that 2.6m taxpayers are within this group.
While no date has been set for extending MTD ITSA to partnerships, the statement confirms that the government remains committed to introducing MTD ITSA to partnerships at a future date.
Over the last several months it had become clear that a deferral was inevitable, given the very small numbers of taxpayers in the restricted pilot and a long list of problems with digitalising tax reporting of trading and property income. These problems include the following.
- A lack of awareness of the MTD ITSA requirements among taxpayers – particularly those with a single source of property income.
- The lack of functionality to allow taxpayers to appoint more than one agent (eg, a bookkeeper to handle quarterly updates and an agent that completes the year-end processes).
- The lack of adequate solutions for the complexity associated with jointly-held property.
- The lack of a design solution for non-tax year accounting periods.
- The design around amendments and corrections and how they are made. A practical design for fitting together the various reporting elements is required. This includes quarterly updates, business source adjustable summary (BSAS)/end of period statement (EOPS), and final declarations. A design where quarterly submissions are of cumulative year-to-date figures could help to resolve this.
- Taxpayers being resistant to using commercial software. This is partly due to its cost, but also because many taxpayers use their mobile phone for their simple record keeping. ICAEW is currently unaware of any product being designed to address this. It is not yet clear whether the software market will deliver free (as opposed to freemium) products.
- The capacity of HMRC, software developers, agents and taxpayers to deliver the change. ICAEW is particularly concerned about the customer support that HMRC and the software industry will be able to deliver and the impact on its member firms.
The last one-year deferral provided the opportunity to identify these problems. It is hoped that the additional time will either afford the time to address these issues or to agree a change in direction.
In the light of these fundamental issues, ICAEW is urging HMRC and government to reconsider some of the key policy and design decisions and return the focus to businesses keeping good quality digital accounting records. Otherwise, there is a risk that this further deferral will not be the final one and it will be difficult to persuade taxpayers to prepare.
Caroline Miskin of ICAEW’s Tax Faculty adds “We appreciate the further two-year deferral, but ICAEW believes that HMRC and government must take the opportunity to reconsider some aspects of MTD ITSA policy. Digitalisation of accounting records and tax compliance can provide businesses and practices with significant efficiency and productivity benefits. However, HMRC should now undertake a critical review and question whether policy decisions made seven years ago are still appropriate. For example, quarterly reporting should be reconsidered. We look forward to working with HMRC and adopting a genuinely open-minded approach to solving the problems.”
The shifting MTD ITSA timeline
Under the original proposals the start date for MTD ITSA was April 2018.
- In July 2017 the start date was deferred to “not before 2020”.
- In March 2019 the start date was deferred to “not before 2021”.
- In July 2020 the start date was deferred to April 2023.
- In September 2021 the start date was deferred to April 2024.
- In December 2022 that start date was deferred to April 2026 for everyone and later for some taxpayers.
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