MAKING TAX DIGITAL - 23.01.2024

Simplifications for small businesses announced

Review

Under MTD ITSA, clients within its scope will need to maintain digital records and provide HMRC with digital quarterly updates using functional compatible software. Simplifications to the design were announced at the time of the 2023 Autumn Statement, and regulations to give statutory effect to those changes, and those announced earlier in the year, were published in December 2023 for consultation.

Start date

The start date for MTD ITSA has already been delayed and the mandation threshold reduced - it was originally due to come into effect from 6 April 2024 for unincorporated businesses and landlords with business and/or rental income of £10,000 or more. As announced earlier in the year, the start date is now 6 April 2026, but only for unincorporated businesses and landlords with business and/or rental income of £50,000 or more. The scope is widened to include those with business and/or rental income of £30,000 or more from 6 April 2027.

Following a review of the impact of MTD ITSA on smaller businesses, the government has decided against making MTD ITSA compulsory for unincorporated businesses and landlords whose business and/or rental income is below £30,000, although the decision will be kept under review.

Pro advice. The thresholds apply to gross income (before deduction of expenses), not profit.

Sole trader clients and landlords running an unincorporated property business need to determine whether they will be within MTD ITSA, and if so, from what date. Where a client both runs an unincorporated business and also has rental income from an unincorporated property business, they need to take account of income from both sources to see if it exceeds the mandation threshold.

Pro advice. It is the total aggregated income that is the key determining factor.

This means that a sole trader who has business income of £30,000 and rental income of £20,000 will be within MTD from 6 April 2026 and will need to maintain digital records and provide digital updates to HMRC of both their business and rental income despite the fact that individually neither source exceeds the mandation threshold. The fact that the thresholds are determined by reference to income, not profit, means that clients will still need to comply where total business and rental income meets the threshold, even if they make a loss.

Simplifications

Design changes are being made to MTD ITSA which will:

• simplify the requirements for taxpayers providing quarterly updates
• remove the requirement to provide an End of Period Statement
• exempt some taxpayers, including those without a National Insurance number from the ambit of MTD ITSA
• simplify the requirements for landlords with jointly-owned property; and
• enable taxpayers to be represented by more than one agent.

The impact of each measure is examined below.

Simpler quarterly updates

The review highlighted the need to be able to amend and correct the quarterly updates throughout the year. Under the original design, taxpayers were required only to provide information relating to that quarter in the quarterly update. This has now been revised and instead clients will provide year-to-date information showing the cumulative position at the end of each quarter.

Pro advice. This will enable the client to amend information submitted for previous quarters.

The information requirements have also been reduced, and are set out in draft notices which have been published for consultation. The information that a client will need to provide each quarter will depend on the nature of their business. In the main this comprises details of income and expenses, which will need to be provided under the headings set out in the draft notice (see Follow up ).

The updates are intended to be simple summaries of business and property income and expenditure; these will be generated from the digital records maintained by the client on a smartphone, tablet or computer. The client will not need to make any adjustments to the figures or to reflect allowances and reliefs to which they may be entitled. Where MTD-compatible software is used, HMRC states that the creation of the quarterly update should be little more than a ‘’check and send’’. Clients whose turnover is below the VAT registration threshold of £85,000 will be able to provide three-line accounts. Clients will also need to specify the quarterly update period start and end date each time they make a quarterly update.

Pro advice. Clients should check the information that they will need to provide well ahead of their start date and choose software that will meet all of their needs (see Follow up ).

Spreadsheets can be used to keep a record of income and expenses, but the information must be uploaded digitally into the MTD-compatible software used to submit the quarterly updates (manual data entry is not permitted).

End of Period Statement

The original design included an End of Period Statement (EOPS) which would contain totals for each transaction category for the year and also information relating to allowances and reliefs, losses or exemption and other adjustments or balancing charges. Feedback received during the consultation indicated the EOPS is potentially confusing and duplicates information contained in the final declaration (equivalent to the current income tax return). Consequently, the requirement to submit an EOPS is removed.

Retail sales notice abolished

The draft regulations also abolish the retail sales notice under which clients with retail businesses would have been required to submit a single digital record of gross daily takings.

Jointly-owned property

Easements are being introduced for landlords who own property jointly. To reduce the administrative burden of complying with MTD ITSA, clients with jointly owned property can choose not to submit quarterly updates of their expenses. They can also maintain less detailed records. However, the client will still need to submit details of expenses incurred in relation in order to finalise their tax position for the year.

Pro advice. Where properties are jointly owned, the joint owners will need to ensure that they maintain sufficient records to enable each to meet their obligations.

Exempt taxpayers

In recognition that certain groups of taxpayers will face barriers in complying with MTD, the regulations will specify particular groups who are exempt from MTD ITSA. This includes foster carers, for example.

More than one agent

Clients within MTD ITSA will now be able to use more than one agent to act on their behalf. This may be useful where a client is represented by one agent in respect of their business income and by another agent in respect of their rental income. Alternatively, a client may use one agent for the submission of the quarterly updates and another to submit the final declaration.