How Good are Chatbots now?
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You need to ensure your practice is ready for the challenges of Making Tax Digital (MTD) in the coming years. MTD provides a route to growth for practices. There’s a chance to evolve with client expectations and requirements to ensure you’re ready to win in the future.
And your clients win too with easier tax administration, and a better insight into their finances because of digital taxes.
MTD for VAT back in 2019 was just the start, with another rollout arriving in April 2022 when all VAT registrants are mandated – including around 700,000 voluntary VAT sign ups.
MTD for Income Tax (MTD for ITSA) then arrives just year later in April 2023. It will present a once-in-a-generation change for small business accounting, mandating more frequent reporting to HMRC and – of course – the mandated use of software for accounting.
No sooner than April 2026, MTD for Corporation Tax (MTD for CT) will bring larger businesses in line with the government’s plans to digitise tax record keeping and submission.
This article aims to answer essential questions about the upcoming waves of MTD, with a particular focus on the earthquake changes within MTD for ITSA.
This article will grow and evolve as the government releases more information about the ongoing kinds of MTD mandation, so be sure to keep it bookmarked. Information here about ITSA is based on the draft Income Tax (Digital Requirements) Regulations, which itself is subject to revision and change.
What’s written below draws on webinars undertaken with representatives from HMRC and hosted by the experts at Sage, most of whom are former accountants. The questions asked really are those put to the expert panel by practicing accountants.
The questions and answers in this guide are organised into the following areas:
MTD for Income Tax: Record keeping, reporting and submissions
MTD for Income Tax and Self Assessment
MTD for Income Tax: General questions and answers
MTD for VAT in April 2022: General questions and answers
MTD for Corporation Tax: General questions and answers
Understanding which clients MTD for ITSA affects, and how, will be key to building out a practice-readiness and response plan for small business clients.
MTD for ITSA will apply to businesses with income greater than £10,000 per year from:
These clients will need to follow the rules for MTD for ITSA from their first accounting period that starts on or after 6 April 2023.
The following are not currently required to join MTD for ITSA:
The types of clients mentioned above are exempt from the current digital requirements under MTD for ITSA and will continue to complete and file a Self Assessment tax return if required.
This will be the case until such time as the government mandates their use of MTD for ITSA.
As with MTD for VAT, it’s likely MTD for ITSA will be introduced across the space of several years but we do not yet have details of any further waves beyond the first.
Limited companies are not within scope for MTD for ITSA but will be within scope for MTD for Corporation Tax, which is expected to be mandated from April 2026 at the earliest.
According to the draft Income Tax (Digital Requirements) Regulations, the digital start date for income tax reporting may be different to the quarterly reporting periods for VAT.
However, we understand HMRC is looking to address this in the future for those businesses wishing to align their reporting periods to reduce their administrative burden.
In theory, yes.
However, if the VAT periods and Income Tax periods are aligned, it may be possible to submit the VAT and Income Tax quarterly updates at the same time.
There is currently no guidance to indicate the reporting dates will be aligned. However, this may be addressed by HMRC further down the line.
The £10,000 threshold applies to the total of a taxpayer’s property income and turnover from self-employment.
The threshold would therefore relate to the landlord as opposed to individual properties.
The number of properties has no impact on the number of submissions. They will need to submit:
The draft Income Tax (Digital Requirements) Regulations suggest that the threshold relates to the total income from a taxpayer’s self-employment and property businesses.
Unless the client is exempt from digital reporting, the rules for Making Tax Digital for Income Tax will apply if the total income from property and self-employment exceeds the threshold.
From April 2023, MTD for ITSA will apply to general partnerships with only individuals as partners and income of more than £10,000 per year.
HMRC hasn’t provided a timeline for any other partnerships, including LLPs.
All other partnerships, including LLPs, that are not general partnerships with only individuals as partners are not included within MTD for ITSA’s initial wave.
These might be included in a future wave of MTD for ITSA mandation, but we’ve yet to receive information from HMRC.
Tax estimates don’t apply to partnerships as they don’t have a tax liability.
Yes, there are no exclusions for individuals whose income is partially or wholly within the scope of CIS.
HMRC hasn’t indicated any changes to CIS due to the introduction of MTD for ITSA.
The successful sign up of clients for MTD for ITSA will be the first step to improved client service, so it’s vital that you get it right.
Your clients (or you on their behalf) will need to sign up to MTD for ITSA in advance of their digital start date (see “What is a digital start date for MTD for ITSA?” below).
There is guidance provided by HMRC for both Business sign up and Agent sign up at Gov.uk.
You can continue to use the same agent services account that you set up for MTD for VAT.
However, you will need to copy your client’s existing authorisation for Self Assessment from your HMRC online services for agents account to your existing agent services account.
If a client is not authorised on your agent services account, you can either:
If they meet the specified criteria, your clients (or you on their behalf) will need to sign up for MTD for Income Tax.
Yes. This launched back in April 2018, albeit with limitations on what kinds of business could sign up.
However, as time goes on the pilot programme is opening to more and more businesses. Accountants can sign up clients using at Gov.uk.
To take part in the pilot, MTD for ITSA-compatible software will have to be used.
The nitty gritty of MTD for ITSA revolves around digital record keeping and more regular submission to HMRC, including quarterly updates, end of period statements (EOPS) and a final declaration.
The number of submissions will depend on the number of businesses the client has.
For each business, you will need to file four quarterly updates and an End of Period Statement to finalise business profits.
In addition, if your client has income from property then four quarterly updates and an end of period statement will need to be filed for property income.
You will then submit a Final Return with any other income, gains or reliefs.
Any non-business income will be submitted after the end of the tax year in the MTD for ITSA Final Return.
The quarterly updates only need to include a summary of income and expenses for the business. Non-business income does not have to be submitted periodically.
No, MTD for ITSA only refers to digital reporting requirements.
It does not affect existing tax rules, including how and when tax is paid.
HMRC has stated that corrections to a quarterly update can be made when a subsequent quarterly update or End of Period Statement is submitted, whichever is due first.
The draft Income Tax (Digital Requirements) Regulations doesn’t mention the use of spreadsheets. This will likely be addressed in the accompanying guidance due to be released this summer.
However, the expectation is that spreadsheets will be as acceptable for MTD for Income Tax as they are for MTD for VAT assuming they are MTD-enabled or used with bridging software.
A digital link is where data is transferred or exchanged electronically and is a key component of all Making Tax Digital legislation (VAT, ITSA and likely CT).
A digital link should not involve any manual intervention, such as copying and pasting or retyping information.
The definition of a digital link includes linked cells in spreadsheets.
For example, if you have a formula in one sheet that mirrors the source’s value in another cell, then the cells are linked.
To follow the rules for Making Tax Digital for Income Tax, you’ll need to get compatible software.
To check which software packages are compatible, visit the HMRC website:
HMRC does not consider the use of ‘cut and paste’ or ‘copy and paste’ to select and move information to be a digital link.
According to the draft Income Tax (Digital Requirements) Regulations, the quarterly obligation periods will depend on the digital start date for a business, which is aligned with its accounting period.
According to the draft Income Tax (Digital Requirements) Regulations, quarterly updates are due one month after the end of the quarter.
The threshold refers to income rather than profit.
The draft Income Tax (Digital Requirements) Regulations suggest this relates to the income for the accounting period two years before the period in question.
For example, for a period ended 5 April 2024, this would normally be the income for the period ended 5 April 2022.
The threshold relates to the sum of the businesses.
So income across all businesses that would normally be included in your Self Assessment return should be used to assess whether the individual is within scope of MTD for ITSA.
MTD for ITSA doesn’t mean the end of Self Assessment – at least not in the initial April 2023 rollout.
Self Assessment will still be a requirement for many who aren’t within the scope of MTD for ITSA.
It might even continue to be a necessity for many who are mandated for MTD for ITSA, as described below.
Yes, if qualifying income is below £10,000 then they are exempt from the current digital requirements under MTD for ITSA and will continue to complete and file a Self Assessment tax return if required.
Similar to MTD for VAT, MTD for ITSA requires businesses and landlords to keep their records digitally and to submit quarterly updates of business income and expenses to HMRC using MTD-compatible software.
Business owners and landlords will no longer file an annual Self Assessment tax return.
Instead, they will be required to send tax adjustments (the End of Period Statement) for each business, as well all other details to finalise their overall tax position (the Final Return) after the end of the tax year.
You will only need to complete a Self Assessment tax return for clients within the scope of MTD for ITSA if the information you need to submit is not supported under Making Tax Digital.
No. MTD for ITSA only applies to individuals with income from self-employment or property businesses that are subject to Income Tax.
If your client is required to complete a Self Assessment tax return for another reason they will continue to do so in line with the current process.
Here are some questions about MTD for ITSA that fall outside of the main categories discussed above.
Yes, MTD for ITSA does not affect existing tax rules – just how the information is reported. Under MTD you can still claim loss relief as you would under Self Assessment.
According to the draft Income Tax (Digital Requirements) Regulations, the digital start date is the date from which a business must keep digital records and make quarterly submissions.
For self-employments and partnerships, the digital start date is the day after the first accounting period that ends on or after the 5th April 2023.
For property businesses, the digital start date is 6th April 2023.
Yes, a relevant entity must use functional compatible software to comply with the following requirements (“the digital requirements”):
(a) to record digital records
(b) to preserve those digital records
(c) to provide a quarterly update
(d) to provide, as applicable, an end of period statement or a Schedule A1 partnership return.
Bridging software is the name for solutions that combine information from different software and digitally submit the submissions to MTD.
Solutions that use bridging software will meet the MTD requirements so long as digital links are preserved
Sage will have solutions for our customers to meet their MTD for ITSA obligations.
Sage is working closely with HMRC, accountants and small business owners to understand and build a great user experience to support the next wave of Making Tax Digital that covers Income Tax.
Customers will need to be on the latest version of their Sage software to benefit from MTD for ITSA enhancements.
This is likely to require that customers have valid software subscriptions.
Although many accountants have worked on MTD for VAT for several years, there are a number of questions often discussed about the pending April 2022 sign up.
Here are some answers.
All VAT registered businesses will need to be signed up to MTD for VAT by 1 April 2022 unless HMRC have approved that the VAT registered business is exempt
HMRC stopped accepting electronic VAT returns via the legacy XML gateway.
Businesses that are voluntarily registered for VAT and that used the XML gateway needed to either register and start using MTD for VAT before the April 2022 mandation, or revert to manual VAT returns.
There is no change to the rules for VAT groups.
If a VAT group’s turnover is above the VAT threshold (currently £85,000), they will already be required to keep digital records and report via MTD.
If the group’s turnover is below the threshold and they are a voluntary filing VAT group, the rules will apply in line with individuals.
Yes, although businesses can synchronise their year ends so the quarterly filing obligations can be completed at the same time.
Yes.
Businesses will not be required to align their obligation periods but may prefer to align dates to simplify their business processes.
Although we don’t yet know a lot of detail about MTD for CT, we know the broad outline of what’s planned and this is unlikely to change.
The government has said it will not mandate MTD for CT before 2026.
Many have interpreted this as implying the first wave of MTD for CT will be introduced in April 2026.
But this is far from certain, and the government has postponed MTD scheme introduction dates several times in the past (often several times).
The government recently completed a consultation phase and, as part of that, published a document that contains some details of the MTD for CT plans.
Among other things, this provides customer journey flow diagrams that show how MTD for CT is likely to function, and the role of the accountant within it.
At the moment we know that MTD for CT will require:
HMRC says it expects this to start in April 2024.
At that point interested businesses can sign up ahead of time, provided they’re using MTD for CT-compatible software.
Many businesses mandated for MTD for CT will already have experience of MTD for VAT, so this will help with education and awareness.
However, the biggest problems are likely to be encountered at the extreme ends of the business size scale.
Small, incorporated businesses that don’t currently use digital accounting will need to make the switch to doing so.
Large businesses that have disparate systems for recording accounting data will need to ensure they’re digitally linked.
At the very least, HMRC envisions that accountants or tax agents will need to step in nine months after the accounting period in order to make required adjustments, claim any reliefs, and finalise the liability.
However, this is subject to change as more detail is released about MTD for CT.
Making Tax Digital is going to be one of the biggest and best business opportunities for accountants in the coming decade.
Learning about its requirements are just the start.
Practice preparation programmes should already be underway to not only provide what clients need but also to make the most of all the opportunities presented.
More touchpoints with clients, the chance to adopt a more advisory role, and even the opportunity to help clients not just upgrade their software but learn how it’s used – growth in your practice really is down to your ability to exploit opportunity.
But one thing is key – you should start now and put Making Tax Digital at the heart of everything you do.
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