In the Autumn Statement 2023, the government announced the outcome of its review into how making tax digital income tax self assessment (MTD ITSA) might be adapted to the needs of smaller self-employed and property businesses.

HMRC and government have responded to representations by ICAEW and others not to lower the turnover threshold at this stage. However, they have missed what may be the last opportunity to take a fresh look at the policy.

Caroline Miskin, Senior Technical Manager Digital Taxation at ICAEW, says: “ICAEW is fully supportive of the use of technology including digital accounting systems and the digitalisation of HMRC services. However, we have significant concerns over MTD ITSA policy, particularly the requirement for quarterly updates. Even if we put those concerns aside, we still doubt that it can be delivered to the current timetable.”

Turnover threshold

Taxpayers with turnover from self-employment and property over £50,000 will be obliged to comply with MTD ITSA requirements from April 2026. Taxpayers with turnover over £30,000 will be obliged to comply from April 2027.

The decision on extending MTD ITSA to taxpayers with a turnover below £30,000 will be kept under review. There is currently no timetable for extending MTD to partnerships and companies.

ICAEW welcomes the news that MTD ITSA will not be extended to taxpayers with turnover of less than £30,000 for the foreseeable future, however, it has concerns over the potential unintended consequences for the software market.

Miskin explains: “Software developers are in a very difficult position as the reduced size of the market (1.75m taxpayers vs 4.2m above £10k) makes investment considerably less attractive for them. We remain concerned about whether there will be any genuinely free MTD products available.”

Penalty reform 

The new penalties system will apply to MTD ITSA volunteers from April 2024. However, until MTD is mandatory, penalties will only be charged on annual obligations arising, not on quarterly updates. 

HMRC recently updated its policy paper, “Interest harmonisation and penalties for late payment and late submission”, to confirm that penalty reform will be introduced as MTD ITSA becomes mandatory. The new penalty regime will eventually apply to taxpayers who are not required to comply with MTD ITSA, but no date has been specified. 

“Uncertainty remains over whether there will be a soft landing on MTD ITSA quarterly update submission penalties,” says Miskin. “In the meantime, HMRC has confirmed that the new penalty regime will run alongside the old system. Operating two different income tax penalty systems for, potentially, several years will add to the administration burden for taxpayers, agents and HMRC. 

Other announcements

• Design of quarterly updates. Rather than quarterly updates being submissions of figures for each three-month period, each update will be a cumulative total of income and expenses for the tax year to-date. This will avoid the need to resubmit quarterly updates where an amendment is needed.
• Removing the end of period statement (EOPS). The separate EOPS requirement will be removed. Taxpayers will need to submit quarterly updates and a final submission/declaration.
• Relaxations for joint property owners. Joint property owners will be able to elect to report income only (and not expenses) in quarterly updates and there will be a simplification of record-keeping requirements to assist them.
• Exempting specific groups. Taxpayers who are not entitled to a national insurance number will be exempt from MTD ITSA requirements. The requirement to operate MTD ITSA will also be removed for qualifying care income (foster carers).
• Multiple agents. HMRC and government have committed to developing a solution allowing multiple agents to act on a taxpayer’s behalf in respect of MTD ITSA. 
• Non-aligned accounting periods. HMRC is working with software developers to explore the development of MTD ITSA software for those with accounting periods that do not align with the tax year.

HMRC will shortly publish a technical consultation on draft regulations reflecting the outcome of the review and implementing the changes to the mandation timetable announced in December 2022.

Announcements are helpful, but not enough

“The changes proposed in the draft regulations are generally helpful, but they are not sufficient to address our concerns,” confirms Miskin. “It remains the case that the requirements will add considerable complexity for many taxpayers, including joint property owners and the self-employed whose accounting periods do not align with the tax year.

ICAEW is also concerned about HMRC’s capacity to deliver the support that taxpayers and agents will need to implement MTD ITSA given HMRC’s current service performance and the continued downward pressure on HMRC’s budget and headcount.

Furthermore, Miskin argues ICAEW is unconvinced about the anticipated additional tax revenue that HMRC considers MTD ITSA will deliver and the extent to which it will close the tax gap. “Some of the assumptions made in 2015 have not been revisited and we believe that the random enquiry programme on which the self assessment tax gap is based is not sufficiently broad to be used for this purpose,” she says.

However, ICAEW believes there is still time for HMRC and government to refocus this project on:

• digital record keeping and filing from software;
• maintaining the current annual reporting cycle, decoupling the quarterly update requirement; and
• prioritising moving income tax self assessment records to the new HMRC platform as a project independent of MTD ITSA. 

Miskin concludes: “Eight years on from the original announcement MTD ITSA has lost its way and needs to refocus on the original objective of making it easier for taxpayers to comply with their tax obligations.”