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Reflections on the MTD ITSA deferral

Author: ICAEW

Published: 20 Feb 2023

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The impact of the December 2022 announcement that the introduction of Making Tax Digital income tax self assessment (MTD ITSA) is being delayed (again) and phased is starting to sink in. Caroline Miskin shares her thoughts on how policy and implementation should develop.

The MTD ITSA pilot is not expected to expand significantly before 2025; until then it is likely to remain in private beta with sign-up only available via software developers. The design for non-tax year accounting dates is unlikely to be delivered before 2024. The functionality to allow taxpayers to appoint more than one agent to deal with different aspects of their MTD ITSA affairs may take longer than that.

The immediate focus for HMRC is on the review of MTD ITSA for smaller self-employed individuals and property businesses – particularly those with a turnover of less than £30,000. The precise terms of the review are yet to be agreed. However, the outcome of the review is expected to be published in late summer 2023. Until the outcome of the review is known, MTD ITSA has not gone away for those with gross income of less than £30,000. If MTD ITSA is mandated for that group, it would be from April 2028 at the earliest.

I am already sensing some reluctance to consider changes to any of the fundamental elements of the policy, such as quarterly reporting. I hope that will not be the case. All options should be on the table. There appears to be little or no benefit to taxpayers from quarterly reporting. The key benefit for them should be the adoption of digital record-keeping.

To make the implementation of MTD ITSA manageable, HMRC seems to be relying on the much smaller numbers of taxpayers that will be mandated to use it from 2026 and 2027. The numbers are 0.7m from 2026 and 0.9m from 2027. This makes a total of 1.6m taxpayers, compared with the previous plan to mandate 4.2m taxpayers from 2024.

Many self-employed traders required to comply from 2026 or 2027 will be VAT registered and complying with MTD VAT. They should therefore find the transition easier. However, that will not be the case for most property businesses. Pushing ahead with implementation without reviewing the policy and design – particularly for that group – would be extremely ill advised.

There is now no start date for MTD ITSA for partnerships nor for MTD corporation tax; they are unlikely to be delivered this decade. HMRC has indicated that basis period reform will continue as planned with the transition year in 2023/24 but it may come under pressure on that point.

Feedback from ICAEW members

ICAEW has already received a good deal of feedback from members, including on MTDtalk the day after the announcement. Many practitioners have indicated that they are breathing a sigh of relief that their smallest and most reluctant clients – particularly single property landlords – will not need to comply until 2028 at the earliest.

Some regret the loss of a driver to encourage clients towards the use of digital record keeping. Many have mentioned the time and effort that has already been expended that could have been spent more usefully elsewhere. Those who adopted a ‘wait and see’ approach feel vindicated. Many have noted that implementation is now the other side of a general election – a new government may have different priorities.

The lacuna does provide significant opportunity. Taxpayers and practices can use the extra time to reconsider their plans for digitalisation and wider use of technology. Decisions on the use of accounting software can now, in most cases, be based on the benefits of digitalisation for the taxpayer, with MTD being something of a side issue. Many ICAEW members in practice have indicated that they will do just this, working with clients that would benefit from greater use of technology.

What ICAEW will be doing

ICAEW had been planning to ramp its support of members on MTD ITSA in 2023, with a coordinated programme of content, webinars and live events. These will now be refocused on digitalisation and the wider use of technology rather than MTD.

The Tax Faculty will be focusing on engaging with HMRC and government on the policy and implementation problems. This will include the review of MTD for smaller businesses alongside other policy and implementation changes that the faculty considers are needed. The problem areas are well established, with a list agreed by HMRC and professional bodies.

We now need HMRC and government to be bold and reconsider some of the fundamental elements of the policy, such as the purpose of quarterly reports and calculations and how the policy should apply to jointly-held property. If quarterly reporting is retained, then switching to submissions being cumulative should simplify error correction.