Sunday, 4 July 2021

UK Tax - MTDfITSA

Making Tax Digital (MTD) for Income Tax Self Assessment (ITSA) is the replacement process to HMRC's Self Assessments (SA) that starts 6 April 2024.  Of the 12 million UK people registered for Self Assessment, woughly 40% are mandated to switch over to MTDfITSA on the 6th of April 2024.  A combined gross income of over £10k from people with either a self employed business or a property business will need to register.

There is a new penalty and fining systems, the amounts of returns and work to complete an ITSA is significantly more than the single once a year SA.

Summary of comparison between ITSA & SA:

SA

ITSA

1 SA return done each year.

4 quarterly returns via approved software per business, required a digital record link to the underlying transactions.

1 End of Period Statement (EOPS) per business.

Crystallization/Finalization using HMRC approved software.

Paper submission due 31 Oct for pervious year.

Online submissions due 31 Jan – 9 months after financial/tax year end.

Approved Digital Software to submit (no paper returns).

1 month after each quarter, submit the quarterly return, these can be revised later.

Each EOPS is due ion 31 Jan the following year.  

The Crystallisation/Finalisation/Final Declaration is also due 31 Jan the following year.

MTDfITSA has been pushed back and it's scoped changed and follows on from Making Tax Digital for VAT (MTDfV) that is already live.  

HMRC use paper for self-assessments, then allowed XML submissions, and is starting MTDfIT to enable individuals to do their own Self-assessments.  Many people doing Self Assessments will be affected, and the associate costs & time shall be higher.  Just under 40% of people file SA themselves. If they need to be on MTDfITSA, it is highly likely that these smaller businesses will be severely impacted.  I believe Accountants that are doing small business self-assessment in the £400-£1,000 range will probably need to double or more these fees.  SA submissions start at about £120 (ex Vat) for simple Self-Assessments, these individuals, if they fall under ITSA shall probably be charged at least triple the amount compared to a TA doing all the work under self assessment or need to do considerably more work themselves.

MTDfVat took several years to implement (April 2022, all businesses, including those registered for MTDfVat but under the VAT threshold, must use MTDfV), and MTDfITSA is way more complicated than MTDfVat.

MTD for Corporation Tax (MTDfCT) is scheduled to start April 2026.  A pilot is scheduled to begin in April 2024 (unlikely).  Update earmarked for 2026, likely to be later.

MTD for ITSA (referred to as ITSA or MTDfITSA) 

  • Who is in - Individuals and Partnerships.  Require either trading income from self-employed businesses and/or property businesses (if you have either of these business types), if their combined revenue/income total is over £10K.  (To determine, need to look two years' back at the individual's self-assessment income).   If not trading in the two years previous means you are outside MTDfITSA.  I.e. new self-employed businesses would get two years grace before they need to file using MTDfITSA.  Unlikely to be enforced by penalties.  The mandatory start for quarters is 6 April 2024. Must have combined property and self-employed (unincorporated) business revenue over £10k combined. 
  • Partnerships are in if all partners are individuals (starts 6 April 2025).  I think there is a disconnect between the draft regulation and what HMRC are providing.  Partnerships declare income using SA800 for a partnership.  Then each individual partner has to do a self-assessment.  There is no way partnership income counts as self-employed income so partnerships are not a criteria for MTDfITSA.  Need to confirm what the "General partnerships with income over £10K that have individual partners need to join MTDfITSA" refers to, I suspect it is incorrect. 
  • Trusts/estates, LLP and Ltd are out at the start.  
  • 1.3 million landlords in the UK as of 2021.
  • Roughly 40% of Self Assessments are filed by individuals for themselves.  This is going to be tricky with MTDfIT.  If these individuals wish to file, they will need to do the quarters, have digital records, and use free software (HMRC are not providing MTDfIT free software).  They will also need to do MTDfIT EPOS and crystallisation.
  • Individuals doing Self Assessment can have ten or many self-employment businesses, 0 to 3 (4 - Foreign property is not clear) property businesses under MTDfITSA (Ord UK property, FHL UK, FHL EEA, Foreign property).
  • One can defer MTDfIT by changing year ends.  Individuals/practices Also can apply for exclusion based on age, religion.
  • Digital links/keeping digital records.  Can't re-key/copy and paste.   There is no requirement to use bank feeds/PDS2 data.  Some booking software firms are likely to file quarterly MTDfIT returns for each self-employed (and property) business.  Spreadsheets are an acceptable form of record keeping.   Excel and bridging software is sufficient for the source for filing.  If recording sales can use daily sales totals for the digital source but ideally link to the raw input system.  
  • PDS2/bank feed - unlikely to work, useful for bringing in data.  The issue is that the bank account would need to represent a single business; also, the mapping would be very rough into the MTDfIT categories.  Things like purchases from Tesco can't understand where to place the transaction.  As MTDfITSA quarterly is a rough estimate.  It is possible as an option.
  • Quarterly MTDfITSA is done per business and is due 1 month after quarter period ends.  Penalty points for late filing, missing 4 quarters in 24 months, is £200 penalty.  Record of last 24 months retained.  Property business quarters and year end run in the same cycles as personal tax namely start 6 April and end the following year 5 April.  As MTDfIT starts on 6 April 2024 (was 6 April 2023 but postponed again notice provide on 22 Sept 2021), the 4 quarterly submission for the 2024-2025 tax year and filling due dates are:

Qrt start date

Qtr end date

Qtr submission due date

6 Apr 2024

5 July 2024

5 Aug 2024

6 July 2024

5 Oct 2024

5 Nov 2024

6 Oct 2024

5 Jan 2025

5 Feb 2025

6 Jan 2025

5 Apr 2025

5 May 2025

  • Self Employed businesses with a year-end of 5 April or 31 Mar, are treaded as using the same period dates as property businesses'.  The majority of Self-employed businesses are already aligned with personal tax year ends.  
  • Each property business for the individual needs to submit an End of Period Statement (EOPS) each year and also a declaration for each business attached to an individual.  
  • Lastly, the Final "Crystallisation" (basically the final Self-assessment) needs to be submitted covering the self-employed business, the property businesses and the personal tax affairs of the individual.
  • Late payment has interest penalties, basically no penalty for 15 days late, then 2% for 16-31 days and then 4% is paid after this.  4% is on the outstanding balance from day past due.  Payment is due following year 31 Jan.
  • MTDfITSA adjustments can be done after the quarter and resubmit or at the EOPS.
  • Quarterly submissions are estimates and can be adjusted per quarter or finalised at year-end for each business.  Revenue could ask for proof of digital linking, so you can't just throw in a rough estimate.
  • After every quarterly obligation is submitted, the response gets a CalculationID, that can be used to view the end clients "year to date tax estimate" for the business.
There are basically Two possible flows for completing ITSA Tax returns:
  1. Full Process/Accountant/Practice/TA has booking data and does the quarters for each trade/business, the practice then does the end of year pieces also, the issue is it will be expensive.
  2. Client Individual Driven Process is where the end user shall submit their ITSA quarterly returns, and then use a practice to submit the business/trades end of years and then the individuals end of year/Crystallization. 

High-Level Process for TA (full process):

  1. Clients sign up to MTDfITSA on HMRC using their Government gateway credentials, assuming they meet the criteria (Agent if authorised to act on the clients behalf can also sign the client up to MTDfITSA).
  2. Clients must maintain digital records, and it must be digitally linkable (spreadsheets are acceptable, min req allows for daily totals in a spreadsheet).  Need to record the transaction date, category and amount.
  3. Perform quarterly submissions per registered unincorporated business.  It can be submitted up to 1 month after the period ends.
  4. EOPS submission per business.  Due 31 Jan following year.  HMRC will return the tax calc for the unincorporated business.  Also, a declaration for each business must be completed by the TA or individual.
  5. Final Crystalisation & Declaration (HMRC does the calculation for the individual) are due 31 Jan following year.
  6. The payment date remains the same for Tax liability due 31 Jan following year.

Note:  All opinions are my own, and I am not a personal tax expert.

Numbers:
  • 32 Million Income tax payers, 4.1 million people are higher rate tax payers.
  • 450k people on additional rate (45%).
  • Median income per UK individual is £25k (males £27,400 females £22,200)
  • +-35k Tax & Accounting Practices in the UK (rough estimate).
  • 12 million people do self-assessments in the UK.
  • MTD ITSA will impact around 4.3-4.7m people (Self employment & landlords).
  • MTDfITSA affects 1.3m individual landlord.
  • HMRC recon they will gather an extra £9 billion per year.
  • HMRC estimate 1 million MTDfITSA customers will quality for the free software from vendors (less than £85k turnover and using cash basis accounting).
  • of the 12.2 million SA's due for the year ending 2020/2021, 10.2 million were filed on time by 31 Jan 2022.  It gets pretty crazy in filing day see HMRC's info.
  • HMRC recon that +-8 million of the 12.2 million 2020/21 self assessment (SA) tax returns have been filed as of 24 January 2022 (1 week to 31 Jan deadline, with Feb no penalty extension in 2020/21 year).  Interestingly the year before 9 million we filed at the same point the year before.
  • The pilot ITSA HMRC sign up is extremely low.  With HMRC estimating 4.3 million ITSA user sign-ups for the year starting 6 April 2024.
My Thoughts 10 Sept 2021 on ITSA:
HMRC have a lot of open questions both on the mechanics of ITSA and the API for MTDfITSA.  The regulation should be finalised +-end of Sept/Oct.  There are very few people that are eligible for the Pilot 6 April 2022 and very few accountants wanting to put their client on MTD.  My personal opinion is that HMRC will end up delaying the start for ITSA as they did for MTDfVat until is if more flushed out.  The API sandbox is not fit for pre-production however, all the vendors are doing best endeavors.  So not impossible to keep the existing timelines but i do feel there will be huge changes to ITSA coming along shortly from Revenue.

Self Assessment filling options:
  1. Most people use the current XML online filing done 31 Jan after the personal tax year.
  2. Some people still use paper based self-assessment due Oct after tax year,
  3. MTD for ITSA will be due 1 month after each businesses quarter, EOPS and finalization/crystallization process due 31 Jan the year after the personal tax year.

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