Making Tax Digital for Income Tax Self Assessment (MTD ITSA) – where are we now?
By Chris Campbell, Head of Tax (Tax Practice and Owner Managed Business Taxes)
8 March 2023
Chris Campbell provides an update on the latest position for Making Tax Digital for Income Tax Self Assessment (MTD ITSA).
What is the current position for MTD ITSA mandation?
Shortly before Christmas, the Government announced what was widely seen as an early Christmas present for both taxpayers and tax practitioners, by postponing the mandation of MTD ITSA (originally scheduled for April 2024) until at least April 2026.
Basis period reform will still go ahead as planned in the 2023/24 tax year, but MTD ITSA will now be mandatory for businesses from April 2026. This will initially be for self-employed individuals and landlords with income above £50,000, with taxpayers with income over £30,000 being mandated from April 2027. Partnerships will no longer be mandated from April 2025, and a revised mandation date will be announced in due course.
There is currently a review being carried out on the needs of businesses with income below £30,000 and ICAS will be playing a full part in the consultation. Please let us know your views on this matter by emailing tax@icas.com.
What is meant by “income” when it comes to the MTD ITSA thresholds?
MTD ITSA mandation will be based on turnover (self-employed individuals) and/or gross rental income (landlords). If a taxpayer has both a trading and a rental business, the gross income/turnover figures would be combined for this purpose. Where a rental property is jointly owned, only the taxpayer’s share of the rental income is included in the calculation of income.
This means that if a taxpayer’s gross income (combining self-employment turnover and gross rental income) exceeds £50,000, they will be mandated for MTD ITSA from April 2026. This mandation will however be delayed until April 2027 if gross income is between £30,000 and £50,000.
For businesses which start operating during a tax year, it is necessary to consider the full tax year position before reaching a conclusion over whether the relevant threshold has been reached.
If a taxpayer’s “income” reduces, will this remove the MTD ITSA mandation requirement?
Once a taxpayer is MTD ITSA mandated, it is expected that there will be the option to qualify for an income exemption for MTD ITSA once their income has fallen below the applicable mandation threshold for three consecutive tax years. There is no obligation to opt out - the taxpayer can, if they wish, continue in the MTD ITSA regime even if they are no longer required to do so on income grounds.
This was the theory in SI 2021/1076, which introduced the original April 2024 timescale for mandation. We have no reason to assume any change to the regulations, but this will be confirmed when updated regulations for the new thresholds are published in due course.
Will there be an exemption for taxpayers who are digitally excluded?
As was the case for MTD for VAT, taxpayers with income above the mandation threshold who are digitally excluded will be able to apply for exemption from MTD. This will be on grounds of age, disability, location, an objection to using computers on religious grounds, or any other reason why it’s not reasonable or practical to submit quarterly returns using MTD compliant software. It's important to note that each case would be viewed on an individual basis.
We have received feedback from our members on significant delays in processing applications for exemption for MTD for VAT. We have relayed this to HMRC and expect the exemption process to be available at least a year before the April 2026 mandation. This reflects the size of the additional exemption population, in addition to those already exempt from MTD for VAT. It is our understanding that those taxpayers exempt from MTD for VAT will not need to re-apply for exemption from MTD ITSA.
Can businesses sign up for MTD ITSA ahead of their mandation date?
Depending on the nature of the business, and the software being used, it should be possible to sign up voluntarily for MTD ITSA ahead of the mandation date. We are aware of instances where HMRC’s systems may not permit early sign up - this is a point we are currently liaising with HMRC on, as it is important that businesses have the option to test their software for at least a year before mandation.
HMRC is currently looking into the practical issues raised by ICAS and other professional bodies. These issues include where a taxpayer has multiple agents (such as a bookkeeper and an accountant) assisting with their affairs, as well as the practical aspects of reporting income from jointly owned rental property. We are also aware that agents who have a significant number of clients will wish to enrol their clients gradually to manage the MTD ITSA process in a sustainable way. We will continue to have discussions with HMRC via our various forums.
What software options will be available for small businesses?
ICAS will continue to have discussions with HMRC regarding free software, although at this stage there is no indication of any such software (e.g. the free software being provided for Real Time Information (RTI) payroll submissions) being provided by HMRC.
Based on HMRC announcements to date, we expect that bridging software will be an option for MTD ITSA, as has been the case for MTD VAT, but small businesses would need to speak with their current software provider in the first instance about compatibility. Alternatively, small business owners may need to consider other options for MTD compliant software ahead of MTD ITSA mandation.
The HMRC website gives some more details on current MTD ITSA software and software under development (some of the providers noted offer bridging software). The list can be found here.
Let us know your views
We welcome members’ input to inform our work on consultations or other tax-related matters – email tax@icas.com to share your insights and feedback. ICAS responds to many tax calls for evidence and consultations, as well as producing tax policy papers and reports. We also regularly attend meetings with HMRC at which service levels, delays and other issues are discussed, and we raise problems being encountered by members.