MTD For Income Tax: Get Ahead Of The Game!

Sarah Bradford points out that taxpayers and agents can sign up for a pilot of making tax digital for income tax before the regime is formally introduced. 

Although making tax digital (MTD) for income tax will not go live until April 2020 at the earliest, taxpayers and agents wishing to get ahead of the curve can sign up for the MTD for income tax pilot. Those signing up for the pilot will need to maintain their business records digitally and send digital income tax updates to HMRC. 

Launched in March 2018, the public pilot is open to:

The plan is to extend the pilot in due course to other groups of taxpayers as new software functionality becomes available. The pilot exercise will allow the software to be tested on a larger scale.

Nature of MTD for income tax 

Under MTD for income tax, taxpayers will be required to maintain digital records and provide digital updates to HMRC using MTD compatible software products. Digital updates must be sent to HMRC at least quarterly (but can be sent more frequently, if this is more convenient). 

Once the information has been transmitted to HMRC, the taxpayer will be able to see an estimate of the tax they will owe for the tax year. The tax estimate will take account of information submitted through the taxpayer’s ‘business tax account’, as well as that submitted as part of the digital upload. At the end of the year, businesses will need to send a final report in order to confirm their income and expenses for the year. If there are allowances or reliefs to be claimed, this can be done via the final report. Once the final report has been submitted, the tax calculation for the year will be available. 

Conceivably, this could be substantially different to the in-year estimates, as income and expense may fluctuate throughout the year (particularly where the business is seasonal), and allowances and reliefs are not brought into the equation until the final report, which may significantly reduce the tax payable. Caution should therefore be exercised when relying on the in-year estimates.

HMRC are keen to encourage businesses to prepare for MTD sooner rather than later; signing up to the pilot allows business to embrace the digital tax revolution while helping road test MTD software.

Those taking part in the MTD for income tax pilot can choose to send updates to HMRC more frequently than every three months. This will allow them to see a more up-to-date estimate of the tax that they owe. It may also fit in better with their own administration procedures – for example, if they enter their income and expenses into their software once a month, it may be easier to upload the information to HMRC at the same time.

Although MTD does not change the dates by which tax must be paid, participants in the pilot can make payments on account of their tax throughout the year. This may be attractive from a cashflow management perspective. However, as noted above, the in-year estimates may be quite inaccurate, and participants might overpay if the payments are by reference to the in-year estimate.

Although when MTD is fully up and running the digital updates will replace the self-assessment return, participants in the pilot will still need to file a return if they have other sources of income. A return will also be required even if there is no other source of income if participation in the pilot does not span the full year. The examples below illustrate when returns are required.

The success of MTD hinges on the software doing what it needs to do. HMRC will not be making free software available for MTD, and it is therefore up to businesses and landlords to find commercial software that meets their needs. This may come at a cost.

HMRC are, however, providing the application programming interfaces (APIs) that commercial software developers will use to develop a range of applications that will enable businesses to keep their records digitally and integrate with HMRC’s system. An API is software that links two or more software programmes together to allow them to exchange data. 

HMRC do, however, produce a list of software suppliers producing MTD-compatible software. The list is available on the Gov.uk website (see www.gov.uk/guidance/software-for-sending-income-tax-updates). At the time of writing, there were only four suppliers on the list; however, more suppliers and software are to be added to the list as the pilot progresses. 

Businesses which are already using software to record their income and expenses, but from a software supplier which does not yet appear on the list, may wish to check with their software supplier when it will be ready to send digital updates to HMRC. If the business is thinking of joining the pilot, it may wish to wait until their current software is MTD-ready, rather than having to switch to a different package.

In their guidance on the MTD pilot, HMRC include the following examples illustrating when updates, and also self-assessment returns, will be required depending when the participant joins the pilot.

You signed up to use software to send Income Tax updates on 6 April 2018.

You send in four Income Tax updates, the last one on 6 April 2019.

In this case your final report is due 31 January 2020.

You’ll still need to send HMRC your Self-Assessment tax return for the tax year 2017 to 2018 no later than 31 January 2019.

You signed up to use software to send Income Tax updates on 6 May 2018.

You send in four Income Tax updates, the last one on 6 May 2019.

In this case your final report is not due until 31 January 2021. This is because your accounts fall in a different tax return period.

You’ll still need to send HMRC your Self-Assessment tax return for the tax years 2017 to 2018, and 2018 to 2019 no later than 31 January 2019 and 2020.’

Sole traders and landlords who wish to take part in the pilot can sign up at the government gateway using their self-assessment user ID and password.

As part of the MTD for income tax pilot, agents can send income tax updates to HMRC on behalf of their clients. However, in order to be able to do this, the agent must first set up an agent services account in order to access new HMRC online services and to use software to communicate directly with HMRC. Sign-up is at the government gateway using the agent’s normal login credentials. The agent will receive a new government gateway ID, which is needed to access HMRC’s new online services. 

Once the agent services account is set up, the agent can sign clients up to the pilot if they are eligible to join. The agent must then use compatible software to send the updates to HMRC.

To get a head start on MTD, consider signing up for the pilot if you are eligible to do so.