The announcement that the start date for MTD for ITSA was to be deferred came as both a surprise and a relief. The Rt Hon Lucy Frazer QC MP certainly hit the ground running as incoming financial secretary to the Treasury, announcing the change within days of her appointment. The deferral is in recognition of the challenges faced by businesses and agents, both through and emerging from, the pandemic. It also responds to stakeholder feedback, particularly a recent letter from leading professional bodies.
Alongside the announcement (made as a written ministerial statement), HMRC published the regulations. Other documents were published setting out who will be within the scope of MTD for ITSA, signposting MTD compliant software (seven brands are listed as available now with a further five in development) and a tax information and impact note analysing costs and benefits.
Businesses and landlords with annual turnover or rental income of more than £10,000 will now have to adopt MTD for ITSA from April 2024. General partnerships will not have to join until April 2025; the joining date for other types of partnerships is yet to be announced.
The start date for the new penalty regime for late filing and late payment of tax for ITSA will be deferred to 2024/25 for those who are mandated for MTD for ITSA and to 2025/26 for all other ITSA taxpayers.
The financial secretary also announced that the proposed basis period reforms would not come into effect before April 2024, with a transition year not coming into effect earlier than 2023.
This pragmatic reaction to submissions by the main professional bodies and other stakeholders has created some badly needed breathing space, for HMRC as well as for the taxpayers. It is vital that full use is made of it.
MTD is at the heart of the government’s ten-year strategy for delivering a modern, world-class digital tax administration system, but it is only one (albeit fundamental) element of what will have to be delivered. In the background, HMRC is modernising its own systems, migrating taxes away from old platforms to its enterprise tax management platform (ETMP). The move to ETMP is an essential step in enabling HMRC to join up data from different sources. Another element of the digital ambition is to build a new single customer record (SCR) and single customer account (SCA) to enable taxpayers to see the information HMRC holds about them. The SCR and SCA will become increasingly important if HMRC is able to increase the amount of third-party information it receives to facilitate the pre-population of tax returns. The OTS believes that the SCA should be the main point of interaction between taxpayer and HMRC.
Many things outside HMRC’s control will have to be factored into the delivery of the ten-year plan as well. Blockchain, open banking, decentralised finance, artificial intelligence, machine learning, robotic process automation and other technologies are all impacting on the way we do business, on tax and on tax administration. The way we work is changing, from the gig economy to working from home. The tax administration system will have to cope with more fragmented, transient and mobile work patterns. Real time data will open new opportunities for bringing tax payments closer to transactions. The December 2020 OECD paper Tax administration 3.0: The digital transformation of tax administration highlights not just the trend towards real-time information but also a vision of a future in which tax is embedded in businesses natural systems.
Increasing numbers of businesses are adopting accounting software and apps; some because of MTD, some because of the impetus given by the pandemic, and some simply because they see a compelling business case, a shift from advising clients on the basis of historical information to advising proactively on the basis of real time information. Recent research carried out for HMRC on MTD for VAT showed the proportion of businesses surveyed updating their records on a continuous basis had increased since the introduction of MTD for VAT from 38% to 48%. Digital transformation is multi-faceted.
The announcements on 23 September create some breathing space, but not much. There is still a huge amount to do before April 2024.
The most urgent thing is to increase the number of participants in the pilot, which has been running since 2018. Currently, it is only possible to participate if you are a UK resident registered for self-assessment with returns and payments up to date and either a sole trader with income from one business, or a landlord who rents out UK property and you do not need to report income from any other sources or make payments that tax relief can be claimed on. That is an incredibly restrictive list, representing a tiny fraction of the four million businesses and landlords potentially within the scope of MTD for ITSA.
The pilot needs to be opened up to different types and sizes of business and to different combinations of income sources as a matter of urgency, especially if the proposed in-year tax estimates are to be reliable.
Personally, I would like to see the roadmap for opening up the pilot shared – and preferably agreed in consultation – with the software developers and representative bodies. That would be both transparent and of great assistance in encouraging taxpayers and agents to join. It would also be in the spirit of collaboration to which the ten-year plan aspires. We cannot deliver this successfully unless we deliver it together. And time is of the essence.
The announcement that the start date for MTD for ITSA was to be deferred came as both a surprise and a relief. The Rt Hon Lucy Frazer QC MP certainly hit the ground running as incoming financial secretary to the Treasury, announcing the change within days of her appointment. The deferral is in recognition of the challenges faced by businesses and agents, both through and emerging from, the pandemic. It also responds to stakeholder feedback, particularly a recent letter from leading professional bodies.
Alongside the announcement (made as a written ministerial statement), HMRC published the regulations. Other documents were published setting out who will be within the scope of MTD for ITSA, signposting MTD compliant software (seven brands are listed as available now with a further five in development) and a tax information and impact note analysing costs and benefits.
Businesses and landlords with annual turnover or rental income of more than £10,000 will now have to adopt MTD for ITSA from April 2024. General partnerships will not have to join until April 2025; the joining date for other types of partnerships is yet to be announced.
The start date for the new penalty regime for late filing and late payment of tax for ITSA will be deferred to 2024/25 for those who are mandated for MTD for ITSA and to 2025/26 for all other ITSA taxpayers.
The financial secretary also announced that the proposed basis period reforms would not come into effect before April 2024, with a transition year not coming into effect earlier than 2023.
This pragmatic reaction to submissions by the main professional bodies and other stakeholders has created some badly needed breathing space, for HMRC as well as for the taxpayers. It is vital that full use is made of it.
MTD is at the heart of the government’s ten-year strategy for delivering a modern, world-class digital tax administration system, but it is only one (albeit fundamental) element of what will have to be delivered. In the background, HMRC is modernising its own systems, migrating taxes away from old platforms to its enterprise tax management platform (ETMP). The move to ETMP is an essential step in enabling HMRC to join up data from different sources. Another element of the digital ambition is to build a new single customer record (SCR) and single customer account (SCA) to enable taxpayers to see the information HMRC holds about them. The SCR and SCA will become increasingly important if HMRC is able to increase the amount of third-party information it receives to facilitate the pre-population of tax returns. The OTS believes that the SCA should be the main point of interaction between taxpayer and HMRC.
Many things outside HMRC’s control will have to be factored into the delivery of the ten-year plan as well. Blockchain, open banking, decentralised finance, artificial intelligence, machine learning, robotic process automation and other technologies are all impacting on the way we do business, on tax and on tax administration. The way we work is changing, from the gig economy to working from home. The tax administration system will have to cope with more fragmented, transient and mobile work patterns. Real time data will open new opportunities for bringing tax payments closer to transactions. The December 2020 OECD paper Tax administration 3.0: The digital transformation of tax administration highlights not just the trend towards real-time information but also a vision of a future in which tax is embedded in businesses natural systems.
Increasing numbers of businesses are adopting accounting software and apps; some because of MTD, some because of the impetus given by the pandemic, and some simply because they see a compelling business case, a shift from advising clients on the basis of historical information to advising proactively on the basis of real time information. Recent research carried out for HMRC on MTD for VAT showed the proportion of businesses surveyed updating their records on a continuous basis had increased since the introduction of MTD for VAT from 38% to 48%. Digital transformation is multi-faceted.
The announcements on 23 September create some breathing space, but not much. There is still a huge amount to do before April 2024.
The most urgent thing is to increase the number of participants in the pilot, which has been running since 2018. Currently, it is only possible to participate if you are a UK resident registered for self-assessment with returns and payments up to date and either a sole trader with income from one business, or a landlord who rents out UK property and you do not need to report income from any other sources or make payments that tax relief can be claimed on. That is an incredibly restrictive list, representing a tiny fraction of the four million businesses and landlords potentially within the scope of MTD for ITSA.
The pilot needs to be opened up to different types and sizes of business and to different combinations of income sources as a matter of urgency, especially if the proposed in-year tax estimates are to be reliable.
Personally, I would like to see the roadmap for opening up the pilot shared – and preferably agreed in consultation – with the software developers and representative bodies. That would be both transparent and of great assistance in encouraging taxpayers and agents to join. It would also be in the spirit of collaboration to which the ten-year plan aspires. We cannot deliver this successfully unless we deliver it together. And time is of the essence.
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