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MTD and income tax

Making Tax Digital (MTD) for income tax will not be mandated until April 2020 at the earliest and much of the detail of the requirements is still unknown. Here 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; all references to businesses on this page includes all these groups. Most of the legislation for MTD for income tax is still only draft. The regulations will not be laid before parliament and the notice containing the details will not be published until the government makes a decision to mandate MTD for income tax.

MTD's impact on unincorporated businesses

Page last updated

28 August 2018

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 in 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.

No changes are being made to:

  • the underlying income tax rules;
  • 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 informal 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 below a threshold which has not yet been set (£10,000 was suggested during the consultation process). The threshold is likely to be applied to the total turnover 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 also includes an exemption for the largest partnerships, defined as those with a turnover of more than £10m.

When does it start?

The obligations will not start until the government makes a decision to mandate MTD for income tax. The start date will not be before April 2020, at the earliest. The legislation is drafted in such a way that the obligations are likely to begin with effect from the start of the first accounting period beginning after 5 April of the year in which MTD for income tax becomes mandatory.

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.

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;
  • to preserve those digital records;
  • to provide a quarterly update; and
  • to 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 small scale, with HMRC exercising tight control over who could join. The pilot moved from private beta/controlled go live 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 (excluding furnished holiday lettings).

HMRC’s guidance states that if a taxpayer has income from other sources this will probably need to be reported on a self assessment return, but ICAEW understands that HMRC intends to make additional functionality available that will allow software providers to build the reporting of other income into their MTD for income tax products. The eligibility criteria are expected to be relaxed as the pilot progresses.

The list of MTD for income tax software available on gov.uk still includes just four software products from Absolute, Forbes, Iris and Rhino. Tax Faculty technical managers understand that approximately 20 providers are working with HMRC on the MTD for income tax pilot and more products should be added to the list as the pilot progresses. However, some providers may wait until the full suite of APIs has been released by HMRC and others may wait until MTD for income tax becomes mandatory. 

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 a book keeper or other agent if required, provided the information is entered into a digital record keeping system at that stage.

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. The 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 income 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 be able to submit their quarterly updates and end of year reports with only these three lines of data but the record keeping requirements mean that they will have to use the full list of categories when recording their transactions.

ICAEW's Tax Faculty understand's 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.

The legal position of those individuals in the MTD for income tax pilot who will be finalising their tax affairs for 2017/18 (and 2018/19 in due course) 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.