Making Tax Digital for Income Tax Self-Assessment
From 6 April 2024, Making Tax Digital (MTD) for Income Tax Self-Assessment (ITSA) will apply to self-employed individuals and landlords with total business and/or property income above £10,000 per year.
Under MTD for ITSA, taxpayers caught by the regime will have to submit quarterly updates to HMRC, providing summary information of income and expenditure for the quarter using MTD compatible software. In this blog, Lynn Gracie shares what we know and how we can help you.
MTD ITSA timeline and quarterly summaries
Following the introduction of MTD for VAT in April 2019, which saw us take part in a pilot scheme and file the first ever MTD VAT return, MTD ITSA was expected from April 2023. However, partly due to the pandemic, we have a new implementation date of April 2024.
If you are caught by the new requirements, you’ll need to maintain digital records and file digital quarterly summaries starting in the quarter ending 5 July 2024. Importantly, this filing should follow the tax year, rather than your accounting year end dates (unless they happen to be the same). There’s only a one-month window for filing, by the 5th of the following month, so the first filing deadline will be 5 August 2024.
Unlike MTD for VAT, HM Revenue & Customs (HMRC) will determine who is caught by MTD ITSA by reviewing 2022/23 personal tax returns, which means that there will be no requirement for you to register in advance.
Looking further ahead and following this phase of MTD, we can expect to see MTD ITSA for general partnerships by April 2025, followed by MTD for corporation tax no earlier than April 2026.
EOPSs and your Final Declaration
At the end of each tax year, and after filing quarterly summaries, an End of Period Statement (EOPS) will be required for each business you own and for any income from property. We can help ensure that this includes any necessary adjustments to take advantage of allowances and tax reliefs.
By 31 January following the tax year end, you will also need to legally declare, via the submission of a Final Declaration, that you’ve provided HMRC with all the information they require and that you agree with their income tax calculation. We can help ensure that this final declaration brings together all your tax information from quarterly updates and EOPSs, together with any income that falls outside of MTD, such as dividends and interest. Your Final Declaration applies to you as an individual, so we’ll only need to submit one for you each year, very much like your self-assessment return.
More about who will (and won’t) be affected
All self-employed individuals and landlords with total business and/or property income above £10,000 per year will be caught by this regime. However, if your income falls below £10,000 for three consecutive years, you will be able to exit MTD ITSA.
There are also exemptions if:
- You are digitally excluded – so it’s not reasonably practicable for you to use digital tools to keep business records or submit quarterly returns due to age, disability or remoteness of location.
- You are subject to an insolvency procedure.
- Your business is run entirely by practising members of a religious society or order whose beliefs are incompatible with using electronic communications or keeping electronic records.
If you fall into any of the above categories, you’ll need to apply to HMRC to claim an exemption, which they will either grant or deny within 28 days.
Other exemptions from MTD ITSA also apply to:
- Trustees of registered pension schemes, and
- Non-resident companies.
How we can help you
If you are likely to be affected by MTD ITSA, we will be in touch again before you need to take any action to be compliant, but it’s never too early to be aware of the forthcoming changes, so that you can start thinking about how to prepare.
Although some of the MTD ITSA platforms are still in development and testing phases, we already use Xero which has received HMRC approval and we await the approval of the CCH platform which we expect may provide a suitable solution for landlords. Just as we successfully supported clients in preparation for MTD for VAT, we will be able to recommend which technology to invest in, and implement it to ensure you can be MTD ITSA compliant.
There was great benefit in us joining the MTD for VAT pilot, so if you’re a landlord or self-employed and you would be interested in helping us take part in the MTD ITSA pilot, please get in touch – all we need to do this is a couple of willing clients.
And finally, we are monitoring MTD ITSA closely and you can rely on us to keep you up to date with any relevant developments. If you have any queries, please get in touch with your usual AAB team member or email Helen Furniss.
Personal tax enquiry for director of four companies
An individual director of four companies received an HMRC personal tax enquiry notice. At the same time each company received a separate enquiry notice involving a full review of accounting and tax records – including corporation tax, income tax, VAT and PAYE.
- Supported the client’s accountant with the initial response to HMRC answering the opening information request. The client’s accountant would not have been able to handle the volume of work required to be submitted to HMRC and manage their daily tasks.
- Gave the client the comfort and support that this was a manageable task using AAB experts in each tax area.
- Allowed the director to step back and let the expert team at AAB to liaise and negotiate directly with HMRC on his behalf.
- Took over 2 years to conclude following various meetings with HMRC however no additional taxes were due.
PAYE, employee benefits and expenses review
Required a review of their PAYE, employee benefits and expenses procedures to ensure they were fully compliant with HMRC and current legislations.
- Review all current processes
- Sampling exercise of their PAYE and employee benefits and expenses records in the same format as HMRC would complete in a compliance review
- Allowed management to focus on day to day running of the business
- PAYE National Insurance issue identified for individuals who had been working overseas for a number of years. This resulted in a substantial National Insurance reclaim for both individuals and the company going back 6 years.
- £204k reclaimed from HMRC which far outweighed the cost of the review.
- Full report outlining findings and highlighted that the employee benefits and expenses had only some minor improvements suggested.
Personal tax dispute with HMRC
A private client required support in an ongoing tax dispute they were having with HMRC regarding their personal tax. During a difficult personal time for the client, they had struggled to keep up with all matters of personal finance, including the submission of Self-Assessment Tax Returns. As a result of the failure to file Self-Assessment Tax Returns, HMRC issued determinations based on estimated income and were seeking settlement of these large estimated liabilities. Still struggling, and not understanding the letters being issued by HMRC, the client settled the liabilities in good faith.
- Confirmed the determinations made by HMRC were grossly over-estimated for all years concerned
- Negotiate with HMRC using experts in private tax legislations
- Client could step-back from the tax dispute negotiations
- Despite initially stating they would not make repayments, HMRC issued the client with a tax repayment in excess of £60,000
Financial service group undertake a VAT health check
There was a requirement for a financial service group of companies to undertake a VAT health check. The companies in the group were separately VAT registered.
- Carry out a review to confirm the existing VAT structure as the most efficient
- Review the client’s partial exemption method and calculations
- Reviewed the groups AP processes to provide assurance that existing processes were robust
- Identified one business using an unapproved partial exemption special method which resulted in an excessive VAT restriction
- Submitted an error correction notification to HMRC recalculating the VAT recovery using the standard method
- Identified another business was using an incorrect VAT treatment. Then submitted an application for a non-statutory clearance to HMRC
- Secured additional recoveries doubling the previous residual recovery
VAT inspection results in penalty challenge
A business received a Notice of Assessment from HMRC following a VAT inspection. HMRC had issued a penalty of 30% of the assessment.
- Completed a full review of the assessment
- Submitted a request for an independent review of the assessment
- Sought to mitigate the level of penalty imposed by HMRC
- Allowed the business to focus on managing day to day operations
- HMRC reduced the VAT inspection penalty to 15% but following recommendations from AAB in improvements to the client’s VAT processes, HMRC suspended the penalty entirely
- HMRC reduced the assessment for the element that had been challenged
UK professional requires tax advice on Indian savings
A high-profile professional who moved to the UK to study and start a career required advice around tax on savings accounts held in India following an invitation from HMRC to clarify funds.
- A full review of her residence and domicile position
- A full disclosure of all interest using HMRC’s offshore disclosure online facility
- Significantly reduced the number years HMRC could assess
- Reduced the tax liability
- Reduced penalties – which could have been up 200% of the tax due
Norwegian Group setting up in UK outsource accounting
A Norwegian Group setting up a company in the UK with focus on developing improved technology for supporting plug and abandonment services look to outsource accounting.
- Provided outsource accounting service utilising cloud-based accounting software.
- Worked in close partnership to understand the client
- Provided support in registering with HMRC for PAYE and VAT services
- Identified Research and Development tax reliefs available
- Advising on complex VAT matters for overseas activity
- Providing Norwegian payroll compliance service for UK employees
- R&D tax relief claim was successfully made
- No internal resource was required in the UK
- Data on accounts became easily accessible online
- Client was provided with a clear understanding of requirements and compliance for UK and Norwegian tax reporting requirements
- Time saving for management in Norway
Business acquisition enables oil service company to expand
Oil services company with worldwide activities required renewal and extension of banking facilities to support organic growth and finance a business acquisition in North America.
- Supported management compile a Strategic Review of the business
- Undertook financial and taxation due diligence on target business
- Assisted with review of financial projections
- Co-ordinated audit of group and completed statutory accounts within three months of year end to meet financing timetable
- Identified key tax issues and solutions to establish an efficient group structure in place for the business acquisition
- Secured funding package for growth aspirations
- Project managed involvement of overseas auditor and tax advisors, saving time, reducing fees and meeting tight deadlines
Compliance cost saving for international company after restructure
A small but internationally focused company providing specialised drilling services to the oil and gas sector. The corporate structure was no longer serving the intended purpose, leaving the group exposed to increased compliance costs. The corporate structure had entities incorporated in three different countries, with branches in a further two countries.
- Prepared and presented a proposal to the client to restructure the group, removing one layer of the corporate structure and minimising the exposure in that country
- The limited in-house financial expertise meant AAB provided full project management, all financial accounting input, and UK tax advice
- Utilising the AAB international network we had experts in accounting, legal and tax advice in Cyprus, the Netherlands and Norway, dealing directly with those firms on behalf of the client
- Significant reduction in annual compliance requirements, with associated saving in compliance costs in the region of $40,000 per year
- Reduced administrative burden, freeing up finance staff to do more valuable activities
- A more appropriate structure with reduced tax exposure across the group