Caroline Miskin provides an overview of the status of HMRC’s digitalisation project, involving VAT, ITSA, CT and penalties.
HMRC’s Making Tax Digital (MTD) project is well established: MTD VAT is a reality and will soon be extended to all VAT-registered traders; MTD income tax self assessment (ITSA) is work in progress in advance of the 2023 start date; and MTD corporation tax (CT) is at early-stage consultation. ICAEW fully supports the digitalisation of business, and the efficiency and productivity benefits that digital record keeping can enable, but it has always been opposed to making it mandatory.
The quarterly reporting requirement for MTD ITSA will impose a major administrative burden on taxpayers for no obvious benefit. ICAEW has raised this concern with government and has expressed similar concerns on MTD CT. The extension of MTD VAT to all traders raises fewer concerns, as it is a transactional tax with no change to reporting frequency.
From April 2022, MTD VAT will be extended to all VAT-registered traders. Announced on 21 July 2020, this is included in the Finance Bill 2021. Around a quarter of such businesses have signed up to MTD VAT voluntarily, so approximately 750,000 businesses will be affected by the extension.
Some voluntarily registered businesses may take the opportunity to reconsider their VAT registration, but there are deregistration pitfalls (see Neil Warren’s article in TAXline April). Others are likely to apply to HMRC for a digital exclusion exemption.
Around 100,000 businesses that should be complying with MTD VAT have yet to sign up. HMRC recently sent a further letter to these businesses. It has not yet charged the penalty of up to £400 for filing a return other than by using MTD software, but may soon run out of patience. Very little is known, by HMRC or ICAEW, about the full extent of compliance with the obligations, which go well beyond how the return is filed and include very specific record-keeping requirements.
The soft landing for digital links within MTD-functional compatible software ended in April 2021. Where digital records are held in a suite of software and spreadsheets, any data transfer between these products must be digital. It remains to be seen how HMRC will enforce this requirement.
Unlike MTD VAT, the MTD ITSA start date is in secondary legislation. Draft regulations were published in 2017, but left to gather dust before consultation restarted in December 2020.
Alongside representations on the detail of the regulations, the faculty has made the case that quarterly reporting, which the government considers to be an essential element of the policy, is misguided and an unnecessary burden.
HMRC intends to expand the pilot of MTD ITSA in April 2021. The signs are that this will be a very small pilot with a limited number of software providers. It may not be sufficient to test the system in what is the last opportunity to run a full reporting cycle before it becomes mandatory.
One uncertainty is how taxpayers will report income other than from trading and property. HMRC’s expectation is that most MTD software will allow non-MTD income to be reported, but it is also building a new service to report such income. This new service will replace the current self assessment system, which will be decommissioned.
MTD CT proposals were subject to a consultation. ICAEW emphasised the need to rethink quarterly reporting. The pilot is expected to start in 2024. MTD CT will not be mandated until 2026 at the earliest. The faculty hopes that HMRC will use this time to engage actively.
HMRC is implementing a new regime for late-submission and late-payment penalties to underpin MTD. The legislation is included in Finance Bill 2021. The regime will apply to VAT from April 2022, before being extended to income tax.
1 April 2022
- Extension of MTD VAT to all VAT-registered traders.
- New late-submission and late-payment penalties for VAT apply to periods starting on or after this date.
6 April 2023
- MTD ITSA applies to unincorporated businesses and landlords with total business or property income above £10,000 per year. New penalties for late submission and payment apply to accounting periods starting on or after this date for taxpayers in MTD ITSA.
6 April 2024
- New late-submission and late-payment penalties apply to accounting periods starting on or after this date for all other income taxpayers within self assessment.
1 April 2026
- Earliest date that MTD CT may apply.
About the author
Caroline Miskin is a technical manager at the Tax Faculty, with responsibility for practitioner matters including MT