The nuclear explosion of MTD for ITSA (Income tax self assessment)

If you thought MTD for VAT was bad just wait for MTD for ITSA (profit and loss for sole traders). In this article ...

If you thought MTD for VAT was bad just wait for MTD for ITSA (profit and loss for sole traders). In this article Benjamin Dyer looks at what is coming next from HMRC.

The big picture

Before diving into what will be the next stage of Making Tax Digital (MTD), it’s worth looking at the overall picture of the programme.

MTD is a massive years-long programme to make all things related to tax move into the digital age. This should eventually result in many improvements.

For instance, at the moment if you do a personal tax return, you tell HMRC how much interest you have received on savings. But a lot of this information is actually supplied direct to HMRC by banks, building societies and other financial institutions. Similarly, you have to provide details of income despite the fact that much of it is already known under the PAYE scheme. This is crazy, you have to dig out the information, HMRC then check it against their records and if there is a discrepancy HMRC need to investigate.

It would be much better for HMRC to put all of this into your tax return in the first place. Then the individual only has to add the information that HMRC don’t know about. It’s an example of what MTD is trying to achieve.

A variety of reasons have been given by HMRC for the MTD project, but my guess that these include: To collect tax that is currently being dodged; to reduce cost within HMRC; and to make life easier and more efficient for businesses and individual tax payers

So, unless you’re a tax dodger, there are some laudable aims for MTD. But there is a mountain range to be climbed before this promised land can be attained.

Will MTD be abandoned?

Since a number of countries have programs equivalent to MTD, some of which are several years ahead of the UK, the programme should be possible. Don't believe anyone, including old-fashioned accountants, who say it will never happen.

So, the chances of MTD being abandoned are extremely slim. During my lifetime, the march of computers has seemed inevitable. Slowly but surely, computers have become a critical part of every aspect of life. MTD is pushing both businesses and individuals to keep computer records but also to communicate digitally with HMRC. It seems unlikely that it will ever be rolled back.

What is MTD ITSA (Income tax self assessment)

MTD for profit and loss, also known as MTD for ITSA, will require every sole trader business with sales of more than £10,000 per annum (that is businesses that aren't a limited liability company or equivalent, to submit quarterly profit and loss returns electronically.

Businesses who join MTD for Income Tax need to, for each trading or property business they operate, submit a quarterly report to HMRC of income and expenses in defined categories. They also have to submit an end of period statement (EOPS) for each of these businesses. The submissions must be based on electronic records using MTD-compatible software.

HMRC will respond by providing an estimate of their year to date tax liability and the estimated tax liability can be viewed at any time. At the end of the year, after their quarterly return the EOPS then finalises the figures, replacing the old Self Assessment tax return.

This means that any sole trader making a living from their business will fall under the new rules. It embraces every little cottage industry. While MTD for VAT hit over a million businesses, MTD for ITSA will impact several million.

It is likely to lead to an explosion in the use of computers and the need for a vast amount of support. After all, VAT registered businesses with minimum sales over £85k can afford an accountant. Most of these smaller businesses impacted by MTD for ITSA can’t.

Unknown to most, there is already a pilot program of MTD for ITSA even though it won’t become compulsory until April 2024.

At first MTD for ITSA will run alongside self assessment, but the end goal will be that all areas where money is earned (employment, investment and trusts and so on) will go onto MTD.

What is the impact likely to be?

The impact is likely to be a lot of complaining, followed by the widespread adoption of computer software to help run businesses. Unfortunately, the reality is that getting businesses to adopt new approaches is hard.

The problem with MTD for VAT was that only tens of thousands of companies were involved in the pilot and nearly a million are having to adopt MTD in a three-month period. That is a recipe for disaster. At the same time, the communication program to tell people about MTD was far too low key.

The way this should have been done was to have an initial pilot, as was done. But then to have heavily communicated compulsory adoption on a rolling basis, for instance by company name in alphabetic order. HMRC could then have controlled the speed of adoption over time.

In comparison with MTD for VAT, GDPR had a huge amount of publicity and a lot of resultant fear. You could say that this was bad, but the good news was that it got taken seriously. In contrast, HMRC has emphasised a light touch to enforcement of MTD which simply encourages procrastination. Since we will all have to comply eventually, it’s less work to do it once and to do it properly.

In summary

Computerising business records and tax returns has got to be good news if we want rising standards of living, which in turn depend on improving business efficiency.

However, there are a number of mountains to climb before everything is fully up and running. HMRC have not really distinguished themselves with the professionalism of the programme so far. Here’s hoping that they will do better in the future and that we can all eventually prosper as a result.

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