Major changes to MTD for ITSA plans announced

Please note that in December 2022, the government announced a further delay to the introduction of MTD for ITSA.

The government has set out a significant update to its plans for Making Tax Digital for Income Tax Self Assessment (MTD for ITSA). It will be postponing the introduction of the initiative by a year following industry pressure.

The new rules were due to apply from April 2023 for unincorporated businesses and landlords with a business or property income over £10,000. However, in August 2021, a number of leading tax and accountancy bodies called on the government to reconsider the timetable, citing the “enormous pressure” the initiative was placing on businesses and their advisers.

In a statement to Parliament on 23rd September 2021, Lucy Frazer, Financial Secretary to the Treasury, said: “The Government recognises the challenges faced by many UK businesses and their representatives as the country emerges from the pandemic […] In recognition of this and of stakeholder feedback, we will now be introducing MTD for ITSA a year later, in the tax year beginning in April 2024.”

What’s the new timeframe for MTD for ITSA?

Under the revised rules, from 6th April 2024, anyone registered for Income Tax Self Assessment with a qualifying income of more than £10,000 will have to keep digital records and send quarterly updates about their business income and expenses to HMRC. They will also have to submit an end of period statement and final declaration.

Partnerships with individuals as partners will have to follow the rules from April 2025. Limited liability partnerships (LLPs) and partnerships with corporate partners will be required to join at a future date yet to be announced. 

HMRC also stated that the new system of penalties for the late filing and late payment of tax announced in March will now come into effect in the tax year beginning in April 2024 for those mandated to use MTD for ITSA. It will apply in the tax year beginning in April 2025 for all other ITSA taxpayers.

What else has changed?

The Income Tax (Digital Requirements) Regulations 2021 were published alongside last week’s announcement. This new piece of legislation sets out some of the finer details about how MTD for ITSA will work. 

Previously published guidance had stated that those affected would have to follow the rules “from their next accounting period starting on or after 6th April 2023”.  However, under the new regulations, everyone mandated to follow MTD for ITSA rules will have a ‘digital start date’ of 6th April 2024, regardless of their accounting period. This means that the new quarterly reporting deadlines will be the same for all, rather than being linked to a business’s accounting period.

In light of this change, many self-employed business owners and landlords will not in fact have an extra year to prepare, despite the delay to the introduction of MTD for ITSA. For example, under the original plans, a sole trader with a year-end of 31st March would have had to follow the MTD for ITSA rules from 1st April 2024 (the start of their next accounting period after 6th April 2023). Under the new regulations, their digital start date will be 6th April 2024, so they will effectively have the same amount of time to prepare.

That said, under the original plans, a sole trader with a year-end of 5th April would have had to follow the MTD for ITSA rules from 6th April 2023 - but the revised digital start date of 6th April 2024 will give them an extra year to prepare. So a five-day difference in the year-end date could be crucial here.

For more details about the changes, see HMRC’s updated collection of guidance on MTD for ITSA.

What about MTD for VAT?

The changes announced last week do not affect the government’s existing plans to extend the scope of MTD for VAT in 2022. Currently, owners of VAT-registered businesses with VATable sales above the VAT threshold are required to keep digital records and submit VAT returns electronically. As planned, these rules will be extended in April 2022 to include all VAT-registered businesses regardless of turnover.

What does this mean for me and my clients?

The revised MTD for ITSA regulations, particularly those around quarterly filing, will have a significant impact on practices - and for sole traders with 31st March year-ends, the MTD for ITSA timeline has effectively not changed. It’s therefore important for practices to continue preparing for the major changes that lie ahead. 

Michael Izza, president of the Institute of Chartered Accountants in England and Wales (ICAEW) told AccountingWEB: “The new start date will allow businesses more time to prepare and their advisers more time to ensure their clients are ready.”

Practices can sign up eligible businesses and landlords to the MTD for ITSA pilot scheme, which has been running since 2018. HMRC has announced that the pilot scheme will be gradually expanded during the 2022 to 2023 tax year, ready for larger-scale testing in the 2023 to 2024 tax year.

FreeAgent already supports MTD for VAT submissions and we are working closely with HMRC to ensure that small business owners, landlords and their accountants will be able to make MTD for ITSA submissions using our software when the pilot scheme is expanded. 

FreeAgent is committed to helping you get your practice and clients prepared for MTD for ITSA and will continue to provide support, advice and helpful resources in the run-up to the initiative’s launch.