Delay of Making Tax Digital for Income Tax Self-Assessment

The start date for Making Tax Digital for Income Tax Self-Assessment (MTD for ITSA) has been delayed for one year and will now be introduced in the tax year beginning in April 2024.

This date has been set in legislation, providing certainty around the timeframe for MTD for ITSA.

Trusts, estates, trustees of registered pension schemes and non-resident companies will not be required to join MTD for ITSA.

General partnerships, not including LLPs, mixed or corporate partnerships, will not commence MTD for ITSA until April 2025 – although this date has still not been set in legislation. There is currently no indication of when other more complex partnerships will have to join the MTD scheme.

It is still not certain if MTD for Corporation Tax will start as planned in 2026.

Turnover for MTD for ITSA

Self-employed businesses and landlords with annual business or property income above £10,000 will need to follow the rules for MTD for ITSA from their next accounting period starting on or after 6 April 2024, regardless of their accounting date.

The £10,000 threshold remains, despite petitioning for a higher entry threshold.

The threshold must consider

  • The taxpayer’s income from all their sole trader businesses; plus
  • Any rental income.

Businesses will be allowed to exit MTD for ITSA if they fall below the threshold for three successive years.

Filing and penalties

It is only when the tax return totals reach the £10,000 threshold that HMRC will issue a notice to file under the MTD regulations.

Penalties will now be introduced for those who are mandated for MTD for ITSA in the tax year beginning in April 2024, and for all other ITSA customers in the tax year beginning April 2025.

Why the delay?

If MTD for ITSA had been mandated from 6 April 2023, the turnover test would need to apply to the figures reported in the 2021-22 tax return and potentially turnover reported in the 2021-22 return.

Reduced turnover and rental income would have impacted many taxpayers in this period because of the pandemic. Local authority grants for businesses liable for business rates would also increase business turnover.

The base year for testing the MTD ITSA turnover threshold will now be the tax year 2022-23. Turnover figures for this year should not be altered by Covid-19 funding and should, hopefully, reflect more normal trading figures.

Changes to the basis period rules delayed

The proposed changes outlined in the Government’s consultation on the reform of the basis period rules will now not come into effect before April 2024, with a transition year no earlier than 2023.

The intention was for all unincorporated businesses to switch to the tax year basis before the introduction of MTD ITSA in 2023 – making 2022-23 the transitional year.

The Government’s proposed reform to the basis period rules involves simplifying the way trading profits of businesses are allocated to tax years under Income Tax Self-Assessment. This will impact the way in which some self-employed traders, partnerships and unincorporated businesses report their taxes.

Implications of switching to the tax year basis before the introduction of MTD ITSA

  • Businesses with an accounting year that didn’t equate to the tax year would have had more than 12 months of profits assessed in 2022-23;
  • There would be a subsequent impact on a wide range of allowances and charges including NIC, student loan repayments and capital allowances; and
  • Using the tax year basis would have brought forward the start of MTD for ITSA for businesses with a 31 March year end, from 1 April 2024 to 6 April 2023.

What happens next?

The Government’s consultation on basis period reform ended on 31 August 2021. It is anticipated that an update on the proposal’s implementation may be announced at the Autumn Budget on 27 October 2021.

We will continue to update you on any new legislation around MTD for ITSA and the progress of the basis period reform consultation as new information is made available. Should you have any queries, please get in touch with your usual M+A Partners contact or email enquiries@mapartners.co.uk