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.
HMRC has said that despite the announced delay to when the self-employed and landlords will be mandated to join MTD ITSA, it expects to deliver functionality at the same pace and to the same internal deadlines as before the announcement, with relatively minor changes to priorities.
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 benefits derive from 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.
The MTD ITSA delay has serious implications for the investment plans of software developers, both large and small. The announcement is a particular problem for those who were planning to develop a product only to facilitate compliance with MTD ITSA; one developer has already announced that it is withdrawing from the market. HMRC cannot deliver MTD ITSA without the cooperation of the software industry and needs to rebuild those relationships.
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.
MTD ITSA will now go on the back burner for agents and taxpayers. This is inevitable and sensible given the many unresolved problems, the continuing small scale of the pilot and uncertainty over software developers’ investment plans.
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
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.
Digitalisation of HMRC services
What has got much less attention is the impact of the MTD ITSA delay on HMRC’s wider Tax Administration Strategy and plans to digitalise its services. The 10-year strategy, published in 2020, is unlikely to be realised within a decade and may need to be revised.
My proposition is that HMRC needs to reconsider its plans for digitalising its services and look at what might be developed alongside MTD ITSA for the self-employed and landlords.
One of HMRC’s internal priorities is to move all taxpayer records on to its Enterprise Tax Management Platform (ETMP). This is important for taxpayers and agents because it provides the solid base on which HMRC can develop digital services. Currently, HMRC is severely constrained by taxpayer records being held on a number of very old databases that need to be upgraded.
This transfer of records has recently been achieved for VAT. All records have now moved from the VAT Mainframe to ETMP (or have been archived). Employer PAYE records are on ETMP (although individual taxpayer PAYE records are not). The default is for new HMRC services to be built on ETMP. MTD ITSA is being built on ETMP and the plan was for individual taxpayer self assessment (SA) records to be moved across as they join MTD ITSA.
My understanding is that HMRC’s intention was to move all SA records from the current Computerised Environment for Self Assessment (CESA) system to ETMP once MTD ITSA had been introduced. This would allow CESA to be decommissioned. I suggest that HMRC should proceed with the re-platforming of SA records. Given its central importance to HMRC’s wider digitalisation plans it should be a separate project and not treated as part of MTD ITSA.
HMRC has already started to develop an ‘update and submit service’ (let’s have a better name!) on ETMP. This service will effectively replace HMRC’s online SA tax return. It is also developing application programming interfaces (APIs) that commercial software developers could use to develop an equivalent to commercial SA tax software. The current software uses extensible markup language (XML) rather than APIs.
Why not develop a shiny new personal tax return service on ETMP alongside developing MTD ITSA? This could deliver many benefits including:
- enabling penalty reform to be introduced for all ITSA taxpayers at the same time;
- allowing the mandation of online filing for SA to be considered with, of course, a digital exclusion exemption;
- replacing the problematic SA calculator (although we do need HMRC to be transparent about the new ETMP calculator and to clarify legal responsibilities);
- supporting the development of the Single Customer Record and Single Customer Account (my understanding is that having records on ETMP is a prerequisite); and
- supporting other changes. Many of the problems with the introduction of CGT UK property reporting have been because it was developed on ETMP and so is not joined up with CESA.
Caroline Miskin, Senior Technical Manager Digital Taxation, ICAEW