This is a subject that I will be returning to in much more detail later. However, I wanted to highlight one bit of good news; HMRC has again postponed the implementation of MTD ITSA for individuals until April 2024 at the earliest. Partnerships will be at least a year later.
What is “MTD ITSA”?
Making Tax Digital is HMRC’s general term for updating procedures surrounding tax returns. It will introduce a far greater degree of electronic communication than hitherto. It is just internal to HMRC, to their own systems and procedures. In fact, the greatest impact is going to be on business owners.
The process has already started. Since April 2019 most VAT registered businesses with a turnover of over £85,000 have had to maintain VAT records in electronic format. From April 2022 nearly all other VAT registered businesses must follow suit.
The next big stage in the rollout is “MTD ITSA” or Making Tax Digital for Income Tax Self Assessment. This applies to unincorporated businesses, basically, anyone who is running a business that is subject to income tax, whether VAT registered or not.
There are some exceptions. For example, businesses with a turnover of less than £10,000 will be exempt. One important point, though, is that property rental is deemed to be business income.
Businesses will need to maintain the financial records in a compliant electronic format. Although in theory, it is possible to do this on spreadsheets, unless you’re an Excel wizard, it would take a lot of time and effort. For all intents and purposes, you’ll need to use a bit of bookkeeping software such as Xero.
The second, and possibly bigger, change is that businesses will need to complete self-assessment tax returns every quarter rather than annually at present. To date, HMRC has not clearly specified the nature of the quarterly return but it is likely to be a simpler return than the current annual income tax self-assessment.
A business with a turnover of over £85,000 and VAT registered would hardly notice a difference. Instead of submitting a quarterly VAT and annual income tax return, they will submit four quarterly income tax and VAT returns; not actually combined returns but very closely linked.
The biggest shock is going to be businesses that are not VAT registered. That is, the overwhelming majority of small sole traders. No longer will they be able to treat accounts are taxation as an annual exercise that can be addressed sometime between April and the following January after the end of the tax year.
They will need to:
- Invest in accounting software
- Complete the bookkeeping promptly (probably within a month, HMRC if not yet said) every quarter
- Submit, or more probably ask that accountant to submit, the quarterly return
And even then the process is not finished; it seems that as well as the fourth quarter’s return it will still be necessary to submit an annual tax return similar to the current self-assessment return.
For a small business, this could represent a huge increase in overheads.
Benefits of Making Tax Digital
Let’s be clear. No matter how HMRC try to present this, it is not being done for the benefit of the small business owner.
Moreover, I have serious doubts that it will be of any benefit to HMRC. As a practising accountant, I’m too well aware that HMRC has difficulty handling the volume of information they currently receive. They’re not going to be able to increase their processing capacity by a factor of four or five. The decision by HMRC to yet again delay implementing the next stage of MTD is a clear sign that they themselves are nowhere near ready.
Even when they are, the most likely consequences are huge amounts of information will be gathered and never used. Brilliant!
It would be wrong to say there are no benefits to the business owner, even if that’s not HMRC’s objective. Electronic recordkeeping can actually be very efficient and time-saving. For a business processing, say, 50 transactions a month, this can cover the cost of a system such as Xero many times over.
However, for a very small business or a buy to let landlord, there will be a considerable increase in time, effort and quite possibly cost for no real benefit.
How can we help you?
A bit of good news. Our existing data processing procedures already convert clients’ submissions into electronic formats; this is fully compliant with HMRC’s MTD requirements. So the only real change will be moving from annual to quarterly returns.
Whilst this will inevitably increase the work required and hence our fees, the increase may well be LESS than the cost to a client of acquiring their own MTD compliant bookkeeping system.