HMRC launches MTD for Income Tax pilot

HMRC’s pilot scheme for Making Tax Digital for Income Tax Self Assessment (MTD for ITSA) launches today (22 April).

Accountants and agents are now able to sign up to the pilot and test the programme out. The pilot aims to assess the MTD for ITSA reporting environment, with an initial focus on clients who are self-employed and landlords with annual income exceeding £50,000.

These clients will be mandated to keep digital records and submit quarterly updates on their income and expenditure to HMRC via MTD-compatible software from April 2026.

HMRC has urged accountants and agents seeking to participate in the pilot to ensure that their record keeping software is up to date and compatible with MTD prior to signing up. Accountants’ clients must also have MTD-compatible software.

A spokesperson for HMRC said: ‘Taking part in testing is a good opportunity to familiarise yourself and a small number of your clients with MTD for ITSA well ahead of 2026. This will help you to prepare your business and be ready to support the rest of your clients.’

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Only five MTD for ITSA software products ready for testing

The Institute of Chartered Accountants in England and Wales (ICAEW) has warned that just five Making Tax Digital for income tax self assessment (MTD for ITSA) software products are ready for beta testing on 22 April.

On 22 April, private beta testing of MTD for ITSA will begin. The ICAEW warns that HMRC has revised the list of software products that support MTD for ITSA, and the new list outlines five developers that are set to release their MTD for ITSA products on 22 April.

Chosen software must be able to create and store digital records of business income and expenses; send quarterly updates; receive information from HMRC; and make your final declaration by 31 January as part of the submission of tax returns.

HMRC recommends checking with the software providers when choosing software to ensure it suits businesses’ needs.

Commenting on the issue, Caroline Miskin, Senior Technical Manager at the ICAEW, said: ‘Choosing the right software is a critical decision. Software products do need to comply with HMRC’s minimum functional standards but these are quite minimal. This means there will be very significant differences between products.

‘Cost is obviously a major consideration. It is disappointing that a wider range of software is not yet available.’ 

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PAC challenges HMRC on governance and accountability of MTD

The Public Accounts Committee (PAC) has challenged HMRC on the governance and accountability of the Making Tax Digital (MTD) initiative.

MPs in the PAC have called for HMRC to reconsider its response to the PAC’s concerns regarding MTD. Writing to HMRC’s Managing Director, Jim Harra, Meg Hillier, Chair of the PAC, requested additional information on how HMRC intends to address MTD issues highlighted in the PAC’s report on the initiative, which was published in November 2023.

Ms Hillier called for HMRC to outline what it is doing differently to ensure MTD processes work more effectively than they have in the past. The PAC has also urged HMRC to carry out a ‘robust assessment’ of how frequent submissions of self assessment information and digital submissions will affect HMRC’s tax revenue.

In the letter, Ms Hillier commented: ‘You have not attempted to demonstrate consideration of further robust testing of the financial information underpinning your programme, for example, controlled behavioural experiments to ascertain the difference that more regular filing can make to the accuracy of returns. VAT returns were already provided quarterly and cannot provide this assurance.’

HMRC said that it intends to ‘ensure that it strikes the right balance between ensuring competition, quality and access to software for its MTD for VAT and self-assessment customers’.

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Report finds HMRC has ‘lost sight of putting taxpayers first’ in relation to MTD

A report published by the Public Accounts Committee (PAC) has warned that HMRC has ‘lost sight of needing to put taxpayers at the heart of changes to the tax system’, including the implementation of Making Tax Digital (MTD).

The PAC stated that HMRC is increasing the burdens imposed on some taxpayers through the MTD initiative. It said that in seeking further investment in MTD, HMRC has not been transparent enough about the ‘substantial costs’ MTD will impose on taxpayers.

According to the Committee, the design of MTD fails to take into sufficient account the realities facing business taxpayers and agents.

It said that while MTD will ‘substantially benefit’ HMRC by improving its systems, taxpayers are asked to spend more and do more in order to be compliant.

The report revealed that HMRC excluded more than £2 billion in upfront transitional MTD costs for taxpayers from its 2022 and 2023 business cases for the scheme. It also found that ‘widespread and repeated’ failures in HMRC’s planning, design and delivery of MTD have led to increased costs and delays to the initiative.

Meg Hillier, Chair of the PAC, commented: ‘When reporting on proposals for digitalising the tax system, our Committee should not have to be recommending that HMRC start with what taxpayers need – in an ideal world, one would hope this would simply go without saying. But seven years and £640 million into the MTD programme, we are concerned HMRC is also succeeding in making tax difficult.’

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MTD expected to cost £1 billion more than originally forecast

A report published by the National Audit Office (NAO) has found that HMRC’s Making Tax Digital (MTD) initiative is expected to cost around £1 billion more than its initial £226 million budget, which was forecast in 2016.

MTD is intended to modernise the tax system for income tax self assessment, VAT and corporation tax. It requires taxpayers to keep records digitally and submit quarterly tax returns.

Whilst the NAO said that HMRC’s vision to digitalise the UK tax system ‘has the potential to bring about a step-change in the system’s efficiency and effectiveness’, it also labelled HMRC’s initial timeframe for the implementation of MTD as ‘unrealistic’. It stated that bosses ‘failed to take the scale of the task into account’.

Commenting on the matter, Gareth Davies, Head of the NAO, said: ‘The repeated delays and rephasing of MTD have undermined the programme’s credibility and increased its costs. They put at risk the support of taxpayers and delivery partners, including those who are essential to the programme succeeding.’

The NAO has recommended that HMRC prepares a separate business case for MTD for Income Tax Self Assessment (MTD for ITSA) so that those making decisions can better understand the costs, benefits and risks associated with the initiative. It has urged HMRC to include ‘greater clarity’ on how taxpayers will be affected.

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‘Fresh thinking’ needed in regard to MTD for ITSA

The Institute of Chartered Accountants in England and Wales (ICAEW) has written to HMRC regarding how Making Tax Digital for Income Tax Self Assessment (MTD for ITSA) can be molded to better suit the needs of small property businesses and the self-employed.

On 19 December 2022, HMRC announced the deferral of MTD for ITSA’s start date and an informal review into the initiative.

The ICAEW has written to HMRC to outline key points that it believes should be considered before the implementation of MTD for ITSA. These include rethinking the ‘disproportionate’ administrative burden associated with quarterly updates; decoupling the requirements to maintain digital records and to submit details of income from self-employment and property directly from software; and refocusing the MTD for ITSA initiative on digital record keeping and filing from software.

HMRC intends to make its final recommendations on MTD for ITSA to the Financial Secretary to the Treasury in June 2023.

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HMRC urges companies that file VAT returns annually to use compatible software

HMRC has urged all VAT registered businesses to use Making Tax Digital for VAT (MTD for VAT) compatible software to keep VAT records digitally and file VAT returns.

From 15 May 2023, businesses that file VAT returns annually will no longer be able to use their VAT online account and instead must use compatible software to file future VAT returns.

HMRC said that businesses that fail to do so may have to pay a penalty. If a business is already exempt from filing VAT returns online or if it is subject to an insolvency procedure, it is automatically exempt. Business owners can apply for an exemption if it’s not reasonable or practical for them to use computers, software or the internet to follow the MTD for VAT rules.

Information on compatible software and how to submit VAT returns under the MTD for VAT initiative can be found here.

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Treasury estimates MTD for Income Tax deferral will cost over £1.75 billion

Figures released in the Spring Budget documents have revealed that the deferral of Making Tax Digital for Income Tax Self Assessment (MTD for ITSA) will cost the Exchequer more than £1.75 billion.

The Financial Secretary to the Treasury previously announced that the £10,000 turnover threshold for MTD for ITSA will increase to £50,000 from April 2026 and £30,000 from April 2027. Meanwhile, the mandation date for partnerships was pushed back from April 2025 to a later date.

The Budget figures suggest that the cost of these changes will total £1.75 billion.

Reviewing the figures, the Chartered Institute of Taxation (CIOT) and the Association of Taxation Technicians (ATT) stated that MTD for ITSA’s benefits may have ‘begun to flow more quickly’ if the government had consulted stakeholders earlier and worked more closely in partnership with them.

Commenting on the issue, Alison Hobbs, Chair of the joint CIOT and ATT Digitalisation and Agent Strategy Committee, said: ‘The announcement to defer the implementation of MTD for ITSA, and subsequently introduce it in a staged manner, was clearly the correct one. The incredibly limited testing, combined with significant problems still to be resolved, meant that this delay had to happen. However, according to government figures, the cost is clearly substantial.’

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MTD for ITSA delayed for two more years

In a written statement, the Treasury has announced that Making Tax Digital for income tax self assessment (MTD for ITSA) will be delayed for two more years until April 2026.

MTD for ITSA was due to take effect from April 2024 and would’ve required all self-employed individuals and landlords with income over £10,000 to report earnings quarterly through the MTD for ITSA system.

However, Victoria Atkins, Financial Secretary to the Treasury, confirmed that the mandation of MTD for ITSA will now be introduced from April 2026, with businesses, self-employed individuals and landlords with income over £50,000 required to join first. From April 2027, those with income over £30,000 will be mandated to join, the Treasury said.

Ms Atkins stated that the government ‘understands businesses and self-employed individuals are currently facing a challenging economic environment, and that the transition to MTD for ITSA represents a significant change for taxpayers, their agents and for HMRC’.

The Treasury said that the government now intends to review the needs of smaller businesses in regard to MTD for ITSA, and will consider how the initiative can be shaped to meet their needs.

Once the review is finalised, the government will outline plans for any further mandation of MTD for ITSA.

The Treasury also stated that the government will not extend MTD for ITSA to general partnerships in 2025, saying that the government ‘remains committed to introducing MTD for ITSA for partnerships at a later date’.

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MTD for ITSA should be delayed, say tax advisers

Tax advisers are calling on the government to delay the introduction of the Making Tax Digital for income tax self assessment (MTD for ITSA) system, according to the findings of a survey.

From April 2024, all self-employed individuals and landlords with income over £10,000 will have to report earnings quarterly through the MTD for ITSA system.

The survey by the Chartered Institute of Taxation (CIOT) and the Association of Taxation Technicians (ATT) found that 97% did not think that MTD for ITSA, in its current form, could be introduced successfully from April 2024.

There were widespread concerns around the proposed launch of the new requirement in 16 months’ time, and tax experts recommended pausing the roll-out to allow time for further consultation.

A third of tax experts said that the report system should continue on a voluntary basis initially, but with a significant increase to the £10,000 minimum threshold.

Nearly half of respondents thought that the MTD extension should be paused and consultation undertaken on its future.

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

‘It is vital that these new processes are fully tested and deliver the intended benefits before they become mandatory.’

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