Making Tax Digital: taxpayers and HMRC not ready for digital quarterly reporting, say tax experts

Tax professionals say the Government should think again about its plans to make it compulsory for self-employed businesses and landlords to keep digital records and report their income quarterly from April 2024.

The results of a recent Chartered Institute of Taxation / Association of Taxation Technicians survey of tax professionals about Making Tax Digital for Income Tax Self-Assessment (MTD for ITSA) highlight widespread concerns around the proposed launch of the new requirement in 16 months’ time, and recommend pausing the roll-out to allow time for further consultation.

Under the current plans, sole traders and landlords with annual turnover or gross income above £10,000 will need to follow the rules for MTD for ITSA from 6 April 2024. For those who are both self-employed and landlords, the £10,000 relates to their total income (from self-employment and property rental).

Yet questions remain for a taxpayer’s ability to appoint more than one agent to support MTD for ITSA, and how, for example, joint landlords should maintain their digital records and submit quarterly updates.

General partnerships will not be required to join MTD for ITSA until 6 April 2025.  MTD for ITSA will require businesses to keep digital records and use MTD-compatible software to file quarterly updates of their income and expenses with HMRC, in addition to their current annual tax filing requirements.

Why are taxpayers and HMRC not ready for MTD for ITSA?

The survey found:

• 97% of respondents do not think that MTD for ITSA, in its current form, can be successfully introduced from April 2024.
• 94% of respondents are uncomfortable with the level of taxpayer awareness.
• 94% are uncomfortable about taxpayers’ ability to comply.
• 65% are uncomfortable about the availability of suitable software.
• Only 3% of respondents are comfortable about HMRC’s capacity and resources to support taxpayers and agents.

On next steps for MTD for ITSA, the survey found that:

• 47% of respondents think that MTD for ITSA should be paused, and consultation undertaken on its future.
• 31% think that MTD for ITSA should continue but on a voluntary basis.
• 30% suggest that MTD for ITSA should continue, but with a significant increase to the £10k minimum income threshold.

“These results confirm what we, and others, have felt for some time,” says Alison Hobbs, Chair of the joint CIOT and ATT Digitalisation and Agent Strategy Committee.

“The incredibly limited testing, combined with there being some key problems still to be resolved, means that HMRC must announce that the April 2024 start date is to be pushed back.”

Hobbs says while she remains supportive of digital tools, which can improve compliance and customer experience, the limited piloting of MTD for ITSA “has yet to demonstrate that it will do either of these things.”

She says, “It is vital that these new processes are fully tested, and deliver the intended benefits, before they become mandatory.”

Doubts regarding benefits of MTD for ITSA

On costs and benefits, the survey found that:

• 92% of respondents are uncomfortable about the cost to clients.
• 79% think that keeping digital records will be useful.
• 51% think that linking digital records will be useful.
• 36% think that quarterly reporting will be useful.
• 28% think that the quarterly tax estimate following the quarterly update will be useful.

The stated objectives of MTD are to make it easier for individuals and businesses to get their tax right and keep on top of their affairs.⁴

“While we support the objectives of MTD, we regret that the consultation around how to achieve them started too late in the process, after critical decisions had already been taken,” says Hobbs. “As our survey demonstrates, it’s time to take a fresh look at how these objectives might be achieved.”

“There are clearly elements of MTD for ITSA where HMRC and stakeholders are largely in agreement as to their benefits, and these might represent parts of the project which can be implemented first. For instance, most respondents see the benefits of keeping records digitally.

Indeed, she says, many of the difficulties arise around the changes to reporting processes, and these are perhaps aspects which might reasonably be deferred until key issues such as the use of multiple agents can be resolved.

The full survey results can be found on the CIOT (here) and ATT websites (here).