Digital reporting delay provides time for rethink on thresholds and mandation

LITRG is generally supportive of HMRC’s desire for businesses to use digital tools as part of the wider digital agenda. However, as the details of the ‘Making Tax Digital’ regime have emerged over the last couple of years, it has become clear that it is not an easy aim to achieve. For these reasons, LITRG do not believe mandation is the way to realise HMRC’s digital ambitions at this stage.  

Sharron West, Technical Officer at LITRG said: 

“We support today’s announcement that mandation of Making Tax Digital for Income Tax (MTD) will be deferred until at least 6 April 2026 and will have a phased introduction at that stage based on income². It has become increasingly clear that the 6 April 2024 start date, already delayed from April 2023, would be impossible to meet. We particularly welcome the announcement that there will be a government review of the needs of smaller businesses, especially those self-employed businesses and landlords with gross income below £30,000, before any mandation for this group takes place.    

“Since MTD was announced, we have said that an income threshold of £10,000 is far too low and brings businesses and landlords who are not liable for income tax into scope³. We are delighted that the government recognise our concerns and will carry out this review.⁴ There can be little benefit to HMRC, or small businesses, in mandating them into MTD as it currently stands.” 

As well as using the time to carry out this review and also grow the pilot and test processes, LITRG would like to see HMRC revisit some of the key details of the new system to consider whether changes should be made, such as their decision not to provide free software for taxpayers with the simplest affairs. 

Sharron West explained: 

“The cost of the software that is required for MTD, together with the training time necessary to learn how to use a specific product, is a concern for many small businesses, particularly if they already maintain adequate business records in another format. The software market has so far not risen to the challenge of offering as many free software products as HMRC had hoped. HMRC are mandating digital record keeping and reporting and we believe the responsibility is with them to provide free software that allows small businesses and landlords to comply with their tax obligations and realise some of the benefits HMRC say MTD will bring them. HMRC should reverse their decision not to develop a suitable basic product.” 

LITRG would also like to see clear detailed guidance on claiming exemption from the MTD process made available in due course so as to allay any worries that some taxpayers may have about complying with MTD where they would expect to qualify for exemption. 

Sharron West added: 

“HMRC remain confident of the benefits of MTD to businesses and landlords, so if changes can be made to MTD to make it a better system then mandation should not be needed as people will naturally be drawn to it in their own time regardless of the MTD threshold. This was the case when online filing was introduced for Self Assessment.⁵  

“We urge HMRC to use this two-year delay wisely, consulting smaller businesses and landlords effectively on their needs and capabilities, and addressing the problems that have been identified, so as to avoid more uncertainty for businesses and landlords.”

Notes for editors

1. Per the Ministerial statement made on 19 December 2022: ‘The government will now review the needs of smaller businesses, and particularly those under the £30,000 threshold. This will look in detail at whether and how the MTD for ITSA service can be shaped to meet the needs of smaller businesses and the best way for them to fulfil their Income Tax obligations. Once that review is complete - and in consultation with businesses, taxpayers, agents, and others - the government will lay out the plans for any further mandation of MTD for ITSA.’ 
    
2. Per the Ministerial statement made on 19 December 2022: Self-employed individuals, businesses and landlords with gross income of over £50,000 will be mandated from 6 April 2026 and those with gross income over £30,000 will be mandated from 6 April 2027. 
    
3. The £10,000 gross income threshold  for Making Tax Digital for Income Tax  is below the personal allowance for income tax (currently £12,570). Self-employed individuals may also pay National Insurance on their self-employment profits. For Class 4 NIC the threshold is planned to be the same as the personal allowance from the 2023/24 tax year so will also be above the  MTD income threshold. For Class 2 NIC you can volunteer to pay NIC if your profits are below the Small Profits Threshold (£6,725 for the 22/23 tax year) and you are treated as making Class 2 contributions if you have profits between the Small Profits Threshold and the Class 4 Threshold. Class 2 must only be paid if profits exceed the Class 4 NIC threshold. 
    
4. LITRG’s report ‘A better deal for the low income taxpayer’ (page 35) called for the £10,000 threshold to be revisited as it was far too low.
    
5. Under Self Assessment there is no mandation to file tax returns online. Taxpayers can use paper tax returns if they choose to do so – there is no exemption required. HMRC provide free software for an individual’s Self Assessment tax return.