Readers will no doubt have seen the announcement that Making Tax Digital for Income Tax Self-Assessment (MTD for ITSA) is being postponed for another year, and will now not take effect until April 2024. This article looks at some of the new information arising from that announcement and the detailed regulations laid before Parliament at the same time, highlighting the key points that advisers and businesses need to know.
More time for partnerships (and basis period reform)
While sole traders and landlords will be within MTD for ITSA from April 2024, partnerships will have a little longer to prepare:
- General partnerships will not be required to join until April 2025; and
- The date when all other partnerships (such as LLPs and those with corporate partners) will be required to join will be confirmed later.
This delay should give HMRC more time to work through the complexities of how to apply the MTD rules and reporting requirements to partnerships.
The MTD announcement also confirms that reform of the basis period rules, originally timetabled for 2022/23, will also be delayed. It now appears that changes will not come into effect for any businesses before April 2024, with a transition year not coming into effect earlier than tax year 2023/24.
The regulations confirm that, despite numerous representations, the income threshold for MTD for ITSA will remain at £10,000. This threshold applies to the total income from self-employment and property, and will be based on the most recently filed tax return. Once a business is in MTD for ITSA, they will only be allowed to exit once their income falls below this £10,000 threshold for three consecutive years.
The regulations also confirm that the digitally excluded (i.e. those for whom it is not reasonably practicable to use digital tools to keep their records or submit quarterly updates) will be exempt from MTD for ITSA. Where a taxpayer believes they may be digitally excluded they will need to apply to HMRC, with HMRC having a tight 28-day turnaround to either confirm or deny exemption.
Other exemptions from MTD for ITSA include:
- Non-resident companies
- Trustees, executors and administrators
- Foreign businesses of non-UK domiciled individuals
Big bang commencement
All businesses which were in existence immediately before April 2023 (‘existing businesses’) will join MTD for ITSA from April 6 2024. This is a big change from previous drafts of the regulations, where the start date for a business was linked to their accounting period.
New businesses which start on or after April 6, 2023, will have a little longer before they come into MTD for ITSA, and will not be required to sign up until after they have submitted their first self-assessment return.
Quarterly updates – all in it together
Another big change from previous proposals is that all businesses will have to provide quarterly updates for the same periods, by the same deadline, regardless of their accounting period.
The quarterly update periods and deadlines for all businesses within MTD for ITSA will be:
- Quarterly update one – period from April 6 to July 5 – deadline August 5
- Quarterly update two – period from July 6 to October 5 – deadline November 5
- Quarterly update three – period from October 6 to January 5 – deadline February 5
- Quarterly update four – period from January 6 to April 5 – deadline May 5.
All existing businesses will therefore have to file their first MTD for ITSA quarterly update, to cover the period from April 6 to July 5 2024, by August 5 2024.
The regulations do provide for a small amount of flexibility in the form of a ‘calendar quarter election’ which allows businesses to draw their quarterly updates to the end of the previous month, rather than the 5th.
This means that, where an election is made, quarterly update one will cover the period from April 1 to June 30, quarterly update two the period from July 1 to September 30, and so on. The deadlines for quarterly updates will remain the same, meaning a calendar quarter election effectively allows quarterly updates to be drawn up to the more convenient end of a month, as well as giving an extra five days to file.
One consequence of these fixed periods is that the end of period statement (EOPS), which is used to finalise the tax position of the business under MTD (in a similar way to the current ITSA return) is decoupled from this quarterly update cycle. Instead, this will remain tied to the accounting period of the business, with the first EOPS due for the first accounting period starting on or after April 6 2024.
Whilst businesses, agents and HMRC now have extra time to prepare for MTD, it’s important that we don’t lose momentum – April 2024 will still come round sooner than you might think.
In the coming years we are expecting HMRC to produce more detailed guidance, increase their communications efforts and extend the existing pilot. Agents should use this extra time to figure out their client’s obligations under MTD for ITSA and help them prepare.