Making Tax Digital for Income Tax DELAYED. HMRC are not ready for the change.
Update – HMRC have announced that the implementation of Making Tax Digital for Income Tax will be delayed until April 2026. It seems that there were too many potential failure points for them to proceed with an earlier implementation!
According to an HMRC representative, at Accountex North 2022, between 4 and 5 million people in the UK will fall with in the new Making Tax Digital for Income Tax regime which comes into effect from April 2024.
Whilst the accountancy profession may be up to speed with the requirements of the new regime, many landlords and self employed business owners who will be impacted know little about Making Tax Digital for Income Tax and what it means for them. In fact at this stage HMRC have been less than forthcoming about the nitty gritty of the new regime, giving only basic guidance on the GOV.uk web site.
Any new system always brings with it a few teething issues but when new rules impact so many people there are bound to be a few things that can fail.
Let’s have a look at what these could be:
Communication
The first problem that this project will face is making sure that people comply which is a huge challenge because they simply do not know about it.
Many people that fall into this new regime (landlords with property income or self employed people with turnover over £10k) have very straight forward accounting and tax affairs and so will be completing their tax returns themselves without an accountant. So they cannot rely on being told about the changes by their trusted advisor.
The new regime is a monumental change to the current way of filing tax returns and, with less than 18 months to go, HMRC have made little headway in telling people about the new requirements.
Communication needs to happen well in advance.
In the run up to the new deadlines regular updates need to occur.
There needs to be a full programme of education to cover the new requirements giving people the (free) tools that they need to comply.
Without this happening failure is the only certain outcome.
Transition
Whilst there is some scant guidance provided by HMRC about the new rules there is no direction on the transition period being the time where the year end tax return under the old system is due at the same time that the new rules apply.
Let’s look at this in detail.
The new rules start from 6th April 2024 which is the start of the tax year that runs from 6th April 2024 to 5th April 2025 – known as the 2024 / 2025 tax year.
The previous tax year (2023 / 2024) runs from 6th April 2023 to 5th April 2024 with the old rules applying to this tax return.
That means that the 2023 / 2024 self assessment tax return needs to be filed any time from 6th April 2024 to 31st January 2025.
The new regime (from 6th April 2024) has quarterly returns as follows:
Q1 covering 06/04/24 to 05/07/24 – due by 05/08/24
Q2 covering 06/07/24 to 05/10/24 – due by 05/11/24
Q3 covering 06/10/24 to 05/01/25 – due by 05/02/25
Q4 covering 06/01/25 to 05/04/25 – due by 05/05/25
End of Period Statement (EPOS) – by 31/01/26 Final Declaration – by 31/01/26
Yes that’s six Making Tax Digital submissions rather than the usual one!
There’s a lot of dates there but the eagled eyed amongst you will see that there’s a lot of overlap of the old system whilst the new one has already started.
The 2023 / 2024 self assessment tax return due by 31/01/25 overlaps with the first three quarterly returns of the new Making Tax Digital for Self Assessment regime which are due by 05/08/24, 05/11/24 and 05/02/25.
It is usual practice to finalise a previous set of accounts and tax returns BEFORE filing the next year’s figures not least to pick up any adjustments, corrections and omissions.
Simply put you need a clean opening position for the next tax year and the only way of getting that is to complete the previous set of accounts.
We’ll have to wait to see the cut over advice from old to new that HMRC give to cater for the overlap in the first year of the new regime.
HMRC will allow the quarter end to be aligned to a month end meaning that 05/07 becomes 30/06, 05/10 becomes 30/09, 05/01 becomes 31/12 and 05/04 becomes 31/03.
The filing deadlines remain the same regardless.
Volume
For the tax return 2021 / 2022 over 10.2 million customers (HMRC talk for tax payers) filed their tax returns. That would be in a 10 month period that ran from 06/04/22 to 31/01/22.
According to HMRC 630k (just over 6%) filed their return on the deadline day of 31st January 2022 with a peak hour between 16:00 to 16:59 when 52,475 pressed submit on their return.
That doesn’t sound too bad for a system to handle.
Roll forward to the new regime.
Each quarter between 4m and 5m Making Tax Digital returns will be filed in less than 5 weeks.
If 6% file on the last day that would be about 300k returns in one day. However given the much shorter deadline for filing that figure is likely to be much higher than the current last minute filer numbers.
We have to hope that HMRC have undertaken extensive stress testing (defined as “a form of deliberately intense or thorough testing used to determine the stability of a given system”) to make sure that the new system doesn’t fall over with volumes of maybe 500,000 or a million submissions on the filing deadline day.
Errors and Corrections
There seem to be two conflicting approaches floating around on how errors will be dealt with. The first is that the End of Period Statement (or the 5th quarter!) is the place where errors will be corrected. The second suggests that the quarterly submission with the error in it would need to be revised and re-submitted.
Both of these approaches have come from different sources at HMRC. The conclusion being that HMRC have not thought about error handling in enough detail yet!
Errors will happen – they just do. That is life. Correcting them needs to be a simple process that doesn’t impose an unrealistic burden on the tax payer.
Whatever the process will be for correcting errors it needs to be defined and clearly communicated by HMRC with all parts of HMRC giving the same consistent messaging.
The nitty gritty
A new system implementation is only successful when the nitty gritty is ironed out well in advance of the change over from the old to the new regime.
With Making Tax Digital for Income Tax it is evident that HMRC just haven’t addressed the detail. There are just too many unknowns and no timeline for when the answers will be available.
Without clarity the value of the data provided will be questionable and the benefit of the whole implementation debateable.
Making Tax Digital for Income Tax places an enormous burden on the very smallest of businesses and landlords. There is no doubt that the time that they spend on their accounting and their accountancy costs will increase. There needs to be tangible evidence that there are positive financial benefits for this fundamental change in approach to the tax returns for sole traders and landlords.
In the worse cost of living crisis that we’ve seen in our lifetimes let’s hope that Making Tax Digital for Income Tax is more than the vanity project that it currently looks like.