MTD income tax: Big bang start in April 2023

Source – Accounting Web

It appears that all self-employed taxpayers will have to start reporting under MTD for income tax (MTD ITSA) from 6 April 2023, which is an acceleration of up to 12 months for mandation into MTD for many unincorporated businesses.

The announcement of the abolition of basis periods from 6 April 2023 has created a good deal of confusion around when exactly unincorporated businesses would be mandated into MTD for income tax (MTD ITSA), and thus when they will have to start filing quarterly submissions using MTD compatible software.

As raised on AccountingWEB’s MTD Bootcamp webinar, many businesses and accountants were planning for the transition to MTD ITSA based on the draft regulations (found in this policy update), as explained in MTD webinars run by HMRC and others.

The basic rule (set out in draft reg 4) is that a taxpayer must join MTD ITSA from the beginning of the accounting period that starts on or after 6 April 2023. Thus, if the accounting period starts on 1 April, the business would be mandated into MTD from 1 April 2024, being the first accounting period that starts on or after 6 April 2023.

Basis period change

The draft provisions that will bring into effect the shift to the tax year basis of assessment, treat an accounting period that ends on any of 31 March, 1 ,2, 3 or 4 April, as if it ended on 5 April, with effect from 2023/24. Any income and expenses arising in the few days after the end of the accounting period and before the end of the tax year will be treated as if they arise in the next tax year.

In the transition year (2022/23) taxpayers will have to report all the expenses and income of the trade that arise between the end of the accounting period that was assessed in 2021/22 and 5 April 2023 (or 31 March if that is the accounting period end). The following basis period for tax purposes to be assessed in 2023/24 will be deemed to start on 6 April 2023.  

Example

When Peter started his self-employed business he made up his accounts to the tax year: 5 April. As his business grew, he engaged an accountant: Bill, who advised him to change his accounting period to end on 31 March. Bill said it would be easier to track income and expenses to the month end, and this change would also give Peter an extra year to prepare for MTD filing. 

Peter was expecting to have to start reporting under MTD ITSA from 1 April 2024, being the first accounting period starting on or after 6 April 2023.

Under the new tax year basis Peter will have to report his business income and expenses in the following years: 

  • 2022/23: 1 April 2022 to 31 March 2023
  • 2023/24: 1 April 2023 to 31 March 2024 – tax year basis.

Peter will be required to report under MTD from the quarter starting on 6 April 2023, as the period 1 April 2023 to 31 March 2024 is deemed to be: 6 April 2023 to 5 April 2024 for tax purposes. This brings forward his start date for MTD ITSA by nearly 12 months.

The CIOT agrees this is a result from the switch to the tax year basis. Pete Miller, chair of the CIOT’s Owner Managed Business Committee, said: “Formally deeming 31 March as equivalent to 5 April is, we believe, also likely to mean that unincorporated businesses will need to follow the rules for MTD ITSA from their next accounting period starting on or after 1 April 2023, rather than 6 April 2023.”

Updated MTD regulations?

The MTD income tax regulations will have to be amended to reflect the change to the tax year basis.

Delay MTD?

The CIOT is concerned about the very tight time frame in which the switch to the tax year basis will take place.

Pete Miller commented: We would have preferred the start date for MTD ITSA to be deferred in order to accommodate a more thorough consultation process and give businesses more time to absorb the impact of the change in the basis period rules before they transition into the MTD regime.”

The ATT is more direct in its recommendation to delay the change in basis period as the pace of change may overwhelm many businesses.

Jon Stride, co-chair of ATT’s Technical Steering Group, said: “Pushing back both the start of MTD for Income Tax and this new proposal would give time to ensure that the basis period change works as smoothly as possible – and it would also allow a full 12-week consultation period.”

Discussions

We understand that discussions are ongoing between the professional accounting/tax bodies and HMRC to resolve this issue.

In response to our questions HMRC has provided this revised statement: “The government announced its intention to explore basis period reform as part of the tax administration framework review and in its consultation on basis period reform published on 21 July. Over the last few months we have been informally consulting with the tax community.

We invite further views through responses to the consultation, including on the reform’s interaction with other aspects of the tax system like Making Tax Digital. The consultation closes on 31 August and the Government will then consider all of the responses in full and will publish its conclusions in due course.”

Separately we received confirmation from HMRC that mandation date for MTD ITSA is 2023.

If 6 April 2023 is to be the big bang start date for all self-employed taxpayers to commence reporting under MTD, this will have huge implications for all accountants who act for small businesses, and for tax software providers. 

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