Quest Chartered Management Accountants (QCMA) describe below the impact on businesses through the government introduction of Making Tax Digital for Income Tax Self-Assessment (MTD for ITSA):
If you have no idea what Making Tax Digital for Income Tax Self-Assessment is, here is the government’s view:
“Digitalisation is a key process for business to undergo. The government are supporting this through Making Tax Digital (MTD); a digital service which is a crucial step in providing a more suitable modern digital service that will serve fit for the 21st century. The aim is to boost business productivity and efficiency by better assisting taxpayers and making the tax system more effective and resilient. MTD for income tax requires electronic records of their accounting and quarterly returns to HMRC from individuals subject to income tax on the profits of their profession, trade or property business.
The government have announced this month a delay to the introduction of MTD for ITSA, which was initially meant to be introduced in April 2023 but will now launch a year later in April 2024 for businesses and landlords with an annual business income of over £10,000 within the tax year beginning April 2024. General partnerships are going to be required to sign up to MTD for ITSA in April 2025. This change has come about due to the obvious current challenges businesses face, having to recover from the COVID-19 pandemic over the last year. HMRC now have more time to produce an efficient and robust service, with more time allowed for testing, and provides more preparation time for businesses that are required to join.
With the previous introduction of MTD for VAT-registered businesses, users of MTD are experiencing reductions in input errors and for many it is simply an extension of the way they previously operate. Many users report having increased confidence in the use of technology and managing their tax affairs, saying that they find it much easier to prepare and submit tax returns. Businesses with income tax obligations would be keen to enrol in MTD for ITSA and the digital approach can work for businesses of every size, with over 25% of companies below the VAT threshold having voluntarily chosen to join.”
However, I must question why on earth are the government introducing this? There are many obvious downsides to the introduction of MTD for ITSA. Initially, the government had promised free software for businesses to use but have now backtracked on their word, meaning that businesses will now have to either pay for the software or must pay someone else to submit returns for them. Many small companies used to file their own self-assessment, PAYE or VAT for free through the HMRC website but will now incur a cost for this. Having to go digital is an intimidating task for many in society not used to working with technology and would make their life a lot more difficult. There is no choice being given to these people as they are forced to use MTD. Deadlines will become more frequent with corporation and income tax returns joining VAT in having quarterly deadlines, causing a lot more hassle for businesses. Another complaint for users is reduced privacy as HMRC will be able to find certain data without the company’s knowledge.
MTD for ITSA can be argued as being just another way of the government getting its hands on the share of people’s income a lot sooner by making businesses declare income more often, giving businesses more of a burden administratively as well as the self-employed. Companies may actually become less efficient due to the added time they would spend on submitting returns and could negatively impact the government’s ability to budget and cashflow, with any economic shock like the current pandemic being harder to budget for. With payments on account still being around, taxpayers potentially face the headache of real-time payments as well as what they may owe under the current self-assessment schemes.