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MTD for income tax guidance

Making Tax Digital (MTD) for income tax will be mandated from April 2023. Much of the detail of the requirements is still unknown. ICAEW's Tax Faculty outlines how it is likely to work and the progress of the pilot.

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Making Tax Digital (MTD) for income tax will be mandated from April 2023. Much of the detail of the requirements is still unknown. ICAEW's Tax Faculty outlines how it is likely to work and the progress of the pilots.

MTD for income tax will apply to the self-employed, partnerships and to those who receive income from property, with gross income from these sources combined above a threshold of £10,000. All references to businesses on this page includes all these groups.

The primary legislation for MTD for income tax has been passed by parliament but the secondary and tertiary legislation is still draft. No date has been confirmed for when the regulations will be laid before parliament and the notice containing the details will be published.

Page last updated

20 August 2020

MTD's impact on unincorporated businesses

When MTD for income tax becomes mandatory, businesses within scope will be required to:

  • maintain their accounting records digitally in a software product or spreadsheet. Maintaining paper records will no longer meet the requirements of the tax legislation; and
  •  submit information quarterly to HMRC and finalise their tax position after the end of the tax year. The quarterly updates and end of year reports will need to made using a functional compatible software product that can access HMRC’s API (Application Program Interfaces) platform.

Businesses within scope will need to acquire a suitable commercial software product or appoint an agent to submit information to HMRC on their behalf. HMRC’s paper and online self assessment return will remain available only to businesses outside the scope of MTD for income tax (and may in due course be replaced).

No changes are being made to:

  • the underlying income tax rules other than in relation to record keeping;
  • the level of detail of the information required to be submitted to HMRC which will remain the same as the current self assessment tax return (though updates will need to be sent quarterly); or
  •  the current filing and payment deadlines for income tax.

Who will be in?

The MTD for income tax requirements will apply to those who receive income from self-employment or property and will also apply to partnerships and trusts. There will be an exemption for those with an annual turnover/gross income below a threshold which is expected to be set at £10,000. The threshold is expected to be applied to the total turnover/gross income from all sources of self-employment and property income.

The requirements will not apply to the trustees of charitable trusts, the trustees of exempt unauthorised unit trusts, the underwriting business of members of Lloyds, holders of shares in real estate investment trusts or participants in open ended investment companies.

The draft legislation includes an exemption for the largest partnerships, defined as those with a turnover of more than £10m.

When does it start?

MTD for income tax obligations will apply from the start of the first accounting period beginning after 5 April 2023.

Exemptions

An exemption for the digitally excluded is included in the draft regulations and mirrors the current exemptions from online filing for VAT. The exemptions cover those that that do not use computers for religious reasons and those that are unable to comply because of age, disability or location (or for any another reason).

Difficult cases will arise, particularly where an individual has some basic digital skills such as being able to send emails but would not be able to cope with accounting software or a spreadsheet. There is no specific age at which the exemption applies; each case will be taken on its merits. Location covers those who cannot obtain access to broadband because of where they are located. The exemption will not apply to those who could sign up for broadband but have not done so.

HMRC is expected to issue further guidance on how to apply for exemption, in advance of MTD for income tax becoming mandatory in 2023.

Software

The government has given an undertaking that free MTD for income tax software will be made available to businesses with the most straightforward affairs.

HMRC’s working assumption is that these businesses are likely to be those that are unincorporated, have income under the VAT threshold, and have no employees. HMRC does not expect to develop any software itself but will work with the software industry to develop free software products.

The use of spreadsheets, either to record individual transactions or as part of a suite of software and spreadsheets will be permitted. However, the spreadsheet will need to be either API enabled or used in combination with an MTD compatible software product so that data can be sent to and received from HMRC systems; an existing spreadsheet alone will not be a free solution for complying with the MTD for income tax requirements. There will be a requirement for digital links if a combination of software products and/or spreadsheets is used.

The draft regulations state that MTD for income tax functional compatible software must be able to:

  • maintain digital records;
  • preserve those digital records;
  • provide a quarterly update; and
  • provide, as applicable, an end of period statement or a Schedule A1 partnership return.

MTD for income tax pilot

The MTD for income tax pilot started in April 2017 on a very small scale, with HMRC exercising tight control over who could join. The pilot moved from private beta to public beta in March 2018. Any business that meets the eligibility criteria and has MTD compatible software can now join the pilot.

The eligibility criteria for joining the pilot are:

  • sole traders with income from one business; and/or
  • income from letting UK property (including furnished holiday lettings).

The individual’s self assessment returns and payments must be up to date and the pilot is open only to those who are UK resident for tax purposes. Individuals who need to report income from any other sources or who make other payments that are taxable or on which they claim tax relief, cannot join the pilot. The pilot is expected to be opened up to most sole traders and landlords by April 2021.

HMRC’s guidance for those that wish to join the pilot is available on Follow the rules for Making Tax Digital for Income Tax. Businesses can sign up from Sign up your business for Making Tax Digital for Income Tax and agents can sign up a client from Sign up your client for Making Tax Digital for Income Tax.

The list of MTD for income tax software available on gov.uk still includes just six software products from Absolute, APARI Software Ltd, Cirrostratus Exedra Ltd, Forbes, Iris and Rhino. More products will be added to the list as the pilot progresses.

Digital record keeping requirements

The requirement to keep digital records will not mean that businesses will have to scan and store invoices and receipts digitally. Businesses can continue to keep documents in paper form if they prefer, but each individual transaction (not summaries) will need to be recorded and stored digitally.

HMRC would like to encourage records to be kept in as near to real time as possible, but it will still be possible to create the digital records at quarterly intervals, using abookkeeper or other agent if required, provided the information is entered into a digital record keeping system prior to the quarterly update being submitted.

The draft regulations indicate that the following records will need to be maintained digitally:

  • the amount of the transaction;
  • the date of the transaction, according to the basis used (cash or traditional accounting); and
  • the categories of transactions into which the transactions fall, to the extent those categories are specified. The categories are expected to be those that are currently used for the full self-employment and property pages on the self assessment return (SA103F and SA105).

Individuals with income from property will be required to comply with MTD for income tax. Where a property is jointly owned, each individual will be required to keep digital records for their share of income and expenditure. ICAEW’s Tax Faculty understands that that digital record keeping will apply to a property business as a whole rather than property by property. Considerable further clarification is required, particularly where there is income from a UK property business, furnished holiday lettings and an overseas property business.

The draft regulations indicate that retailers will be able to elect to record their gross daily takings rather than individual transactions. A further exemption covering situations where it would be impractical, impossible or unduly onerous to maintain digital records for each transaction is likely to be needed but is not included in the draft regulations.

Quarterly updates and end of year activity

Businesses will be able to choose their periods of account and their update periods. The basic requirement will be for four quarterly updates a year. The legislation does not allow HMRC to require returns more often, but a business will be able to submit extra updates mid-cycle if it wants to submit an extra one. The time window for submission will be from 10 days before the quarter end to one month after.

The information to be submitted will be either three-line account information or based on the level of detail required by the current system of categorisation in the self assessment return. Under the current system, businesses with annual turnover below the VAT threshold are eligible to use ‘three-line accounts’, meaning only income, expenses and profit need to be reported. These small businesses will continue to be able to submit their quarterly updates and end of year reports with only these three lines of data. However, the record keeping requirements mean that they will have to use the full list of categories when recording their transactions.

ICAEW's Tax Faculty understands that a quarterly return must be filed for each business. For example, an individual operating as a sole trader who also has a property business would need to make eight quarterly returns.

The deadline for finalising taxable profit for a period will be 31 January following the year of assessment in which the profits for that period of account are chargeable to income tax (the existing self assessment deadline).

This finalisation could be done at the same time as when the final regular update for the year is submitted, but for businesses making year-end adjustments or claims to reliefs, it is more likely to be done later.

Self assessment requirements and the legal position of pilot participants

The legal position of those individuals in the MTD for income tax pilot who will be finalising their tax affairs for 2018/19 and 2019/20 by completing the MTD end of year process rather than filing an SA return was initially unclear. Although those in the pilot will be finalising their tax position when the primary legislation for MTD for income tax is on the statute book, neither the regulations nor the notice are yet in force.

HMRC published (on 14 March 2018) a commissioners’ direction which allows those in the MTD for income tax pilot to use relevant software to deliver information equivalent to a personal return and self-assessment under sections 8 and 9, Taxes Management Act 1970. This direction provides the necessary certainty that completing the MTD for income tax end-of-year process satisfies the obligation to file a self assessment return.