Why there’s still unanswered questions surrounding Making Tax Digital

We first heard about Making Tax Digital (MTD) for Income Tax Self-Assessment (ITSA) all the way back in 2015. It was initially going to spearhead the MTD revolution – which is still very much the government’s end-goal - where all tax will eventually be ‘made digital’, but there were teething problems and many, including IPSE, criticised the overly ambitious timetable.

Fast forward to today and the timetable has undergone a few significant revisions. MTD for ITSA still isn’t here, yet, and while it is almost certainly coming, exactly what it will entail – and who will be affected - is still not entirely clear.

MTD is a UK government initiative aimed at modernizing and digitising the way individuals and businesses manage their tax obligations. It requires taxpayers to keep digital records of their income and expenses and submit their tax returns digitally using compatible software. MTD for VAT was introduced in 2019 and – by all accounts – it’s been a relative success (in as much as most seem to have transitioned to the new system without major problems). But MTD for ITSA is more complicated. It impacts more taxpayers, some of whom may have difficulty complying, and, under the original design at least, it comes with additional requirements.

This week, HMRC officials appeared before the Public Accounts Committee to discuss the progress with Making Tax Digital and how the long-delayed rollout now compares to HMRC’s original vision. IPSE submitted evidence to the committee ahead of the session and we continue to engage with HMRC on these plans, particularly around how the turnover threshold and reporting requirements will work.

Here's how MTD for ITSA was originally intended to work:

Digital record-keeping

Taxpayers will be required to maintain digital records of their business income, expenses, and other relevant financial information. These records must be stored in a digital format that is compatible with MTD-enabled software.

MTD-enabled software

Taxpayers will need to use MTD-compatible accounting software or apps to record and store their financial information. The software should be capable of sending updates to HM Revenue and Customs (HMRC) directly. The government has made a commitment that free software will be available for the simplest, smallest businesses. The idea is that everything (or almost everything) can be done on a smart phone.

Quarterly updates

Here’s where it starts to get more controversial. Instead of submitting just one annual tax return, taxpayers will be required to provide quarterly (or more frequent) updates to HMRC. These updates will include a summary of their income and expenses for that period. There will then be a final year-end submission.

Integration with third parties

MTD software may be integrated with other digital systems, such as banks or accounting software, to facilitate the seamless transfer of financial data. This integration can automate processes and reduce manual data entry. It’s not clear how advanced this aspect of MTD is at the moment.

Exemptions and deferrals

Individuals with a turnover below a certain threshold will be exempt. That threshold has been another source of continued debate. Initially the government were insistent on the threshold being just £10,000. IPSE, and many others, argued for years that £10k is too low. There may also be exemptions for those that do not use computers on religious grounds.

Revised timetable

MTD for ITSA was going to be mandated from next year, late in 2022 the government announced it would once again be postponing the deadline. The current timetable is as follows:

• From April 2026, individuals with income above £50,000 will be required to comply with MTD
• The following year (2027) that threshold drops to £30,000
• For those with incomes below £30,000 and above £10,000, the government is currently reviewing options (and IPSE is consulting with them)

What’s IPSE’s position on MTD for ITSA?

IPSE supports the overarching aims of MTD. Indeed it is hard to argue with a plan to make tax administration more effective and efficient, and we agree that MTD could deliver that. Moving tax more firmly into the digital sphere makes sense and most businesses will adapt to digital record keeping fairly easily – many are doing so already.

IPSE does not support the mandatory quarterly update requirement. We have never understood why the push toward digital must be accompanied by additional reporting burdens. While some businesses might want to provide more regular updates, so they can more readily understand their tax liabilities in-year for example, we know that other businesses do not need this. For them, the quarterly updates will act as another set of deadlines, which they may miss and, presumably will incur penalties if they do. We are currently pushing government to drop the quarterly update requirement. Government is in listening mode on this, but it remains to be seen where it will end up.

We think the new threshold of £30,000 is much more sensible than the original £10,000. We are still not sure why £30k has been chosen – it seems somewhat arbitrary – but we agree that once income gets to this level it is more likely that digital record keeping will benefit the businesses (and indeed they may be doing it already).

For those with incomes under £30,000 we are urging for MTD to be voluntary. Mandating this group will require many fledging or hobby businesses to change their record keeping procedures, purchase or acquire new software, possibly get a smart phone where they don’t have one currently (and don’t really want one), and then potentially have to send regular updates to HMRC.

HMRC clearly hopes that MTD will help to close the tax gap. It is being quite open about this – as it should be. HMRC has also being trying to sell MTD as being tremendously beneficial to individuals and businesses, which it might be, for some, but for others it will just mean more cost and more deadlines and potentially more penalties. The smallest businesses should be exempt and for bigger businesses MTD should be made a simple as possible to comply with.

For more information on Making Tax Digital, we've collated the latest advice on how MTD could impact your business in our MTD guide.