Policy paper

Extension of Making Tax Digital for Income Tax Self-Assessment to Businesses and Landlords

Updated 2 February 2022

Who will be affected

The government is extending the requirement to operate Making Tax Digital (MTD) to the 4.2m taxpayers with business and/or property income over £10,000, including landlords, sole traders and partnerships, for their Income Tax obligations.

These changes will apply to businesses, self-employed individuals and landlords who are chargeable to Income Tax.

General description of the measure

Making Tax Digital (MTD) is the first phase of the move towards a modern, digital tax service fit for the 21st century. It supports businesses through their digitalisation journey and provides a digital service that many have come to expect in their everyday lives. MTD and its extension forms a crucial building block in the government’s 10-year strategy, ‘Building a trusted, modern tax administration system’, published 21 July 2020, to make the tax system more resilient and effective, to boost business productivity, and better support taxpayers.

The Government recognises the challenges faced by many UK businesses as the country emerges from the pandemic over the last year. In recognition of this and of stakeholder feedback, we will now be introducing MTD ITSA a year later, in April 2024 instead of April 2023.

MTD ITSA builds on the successful introduction in April 2019 of MTD for those VAT-registered businesses with taxable turnover above the VAT threshold and will follow the introduction of MTD for VAT-registered businesses with turnover below the VAT threshold from April 2022.

There is a growing body of evidence, from research and insights from taxpayers already operating MTD VAT, which demonstrates that MTD is securing a range of benefits for those that use it in practice. MTD users are reporting that preparing and submitting returns is easier, and that MTD has increased their confidence in managing tax affairs and using technology.

Over a quarter of VAT-registered businesses below the VAT threshold have voluntarily chosen to join MTD VAT, demonstrating that a modern, digital approach to managing tax can work for businesses of every size. Many of these businesses will also have Income Tax obligations and will be keen to operate MTD ITSA.

Under MTD, businesses must keep digital records and use third-party software to submit their tax returns to HM Revenue and Customs (HMRC). Under the changes, those mandated to use MTD ITSA will need to keep records of their income and expenditure digitally and send a quarterly summary of income and expenses, and an end of year report, using MTD compatible software (or applications).

The software these businesses use must be MTD enabled, and capable of receiving information from HMRC digitally via HMRC’s Application Programming Interface (API) platform.

More information can be found at Making Tax Digital (MTD) – Customer Costs and Benefits for the Next Phases of MTD where the impacts, costs and benefits to businesses and individuals of the next phases of MTD expansion (ITSA and VAT) together, set out in further detail.

Policy objective

MTD and its extension forms a crucial building block in the government’s 10-year strategy to make the tax system more resilient and effective, to boost business productivity, and support taxpayers.

UK businesses and individuals are increasingly turning to digital tools and it is vital that the UK’s tax administration system keeps pace. MTD aims to help tackle the part of the tax gap caused by error and failure to take reasonable care, by removing opportunities to make certain types of mistakes in preparing and submitting tax returns. It does not change businesses’ tax liability or payment obligations, but reduces scope for error, and allows for better customer interaction and guidance through digital prompts and nudges. This in turn contributes to a reduction in the tax gap, supporting public services and levelling the playing field for businesses. The projected gains to the Exchequer resulting from MTD reflect the reduced scope for error.

Businesses that move to real-time record keeping using accounting software may experience significant productivity benefits, as their software provides an up-to-date picture of their finances and may also provide additional functionality to integrate record keeping with other business processes. This can further reduce time spent on administration, allowing businesses to spend their time serving customers, innovating, growing and creating jobs.

Businesses will therefore also save time through processes that help them get their taxes right first time and reduce the chances of time spent putting errors right at a later stage. Less time spent on tax administration has scope to cut stress and allow businesses to focus on their most pressing business priorities.

Background to the measure

Originally announced at Budget 2015, and following formal consultation in 2016, the first phase of MTD was implemented from April 2019.

For VAT periods starting on or after 1 April 2019, VAT-registered businesses with a turnover above the VAT registration threshold have needed to keep their records digitally and provide their VAT return information to HMRC through MTD-compatible software.

In July 2020, the government published ‘Building a trusted, modern tax administration system’, which set out a vision for the future of tax administration in the UK, designed to improve its resilience, effectiveness and support for taxpayers.

A long-term strategy of focused, collaborative and transparent improvement of the tax administration system has the potential to yield huge benefits, both for individual taxpayers and businesses. It also contributes to the collective strength and resilience of the country as a whole.

Extending MTD is a critical building block for this, with the expansion of mandatory MTD VAT from April 2022 and the introduction of mandatory MTD ITSA from April 2024, a year later than announced in July 2020.

Detailed proposal

Operative date

Businesses, self-employed people and landlords will be required:

  • to operate MTD from 6 April 2024 in relation to their trading and property income chargeable to Income Tax and Class 4 NICs if their gross income from these income sources for a tax year exceeds £10,000

  • to keep their records digitally (for ITSA purposes only),provide digital quarterly updates and provide their ITSA return information to HMRC through MTD compatible software

Current law

Sections 60(1) to (3) and sections 61(1) to (5) of, and Schedule 14 to, the Finance (No. 2) Act 2017 contains framework legislation enabling MTD ITSA.

Proposed revisions

The new MTD ITSA regulations require a relevant person to keep and preserve their tax records electronically and to submit reports to HMRC using approved software. A report of the business’s trading or property income, allowable expenditure and claims for allowances or reliefs against such income must be submitted in relation to each tax year (property businesses) or basis period (trading businesses). Interim reports must be submitted quarterly on fixed dates that are set out in the regulations. A consultation draft of these regulations was published in September 2017 for consultation and a revised draft was published in December 2020.

Summary of impacts

Exchequer impact (£million)

2020 to 2021 2021 to 2022 2022 to 2023 2023 to 2024 2024 to 2025 2025 to 2026
- - +20 +55 +210 +400

These figures are set out in Table 2.2 of Budget 2021 as ‘Future of Making Tax Digital’ and cover both the extension of obligations of Making Tax Digital (MTD) VAT to taxpayers with a turnover of between £0 and the VAT threshold from April 2022 and the introduction of Making Tax Digital (MTD) obligations to Income Tax businesses and landlords with income above £10,000 from April 2023. These figures have been certified by the Office for Budget Responsibility as of Spring Budget 2021. More details can be found in the policy costings document published alongside Spending Review 2020.

Table 2.2 of Budget 2021 can be found in the Budget documents.

The Exchequer impact of this measure will change in light of the later start date. The impacts will be updated and scrutinised by the Office for Budget Responsibility and will be set out at the next fiscal event.

Economic impact

This measure is not expected to have any significant macroeconomic impacts. The independent Office for Budget Responsibility (OBR) agrees with this assessment.

Impact on individuals, households and families

This measure will have an impact on individuals who run their own business or let out property to the extent reflected in the ‘Impact on businesses’ section.

The measure is not expected to have an impact on family formation, stability or breakdown.

Equalities impacts

The government has been clear that if a business cannot go digital, it will not be required to do so.

MTD is intended to help businesses get their tax right, with mandatory use of digital record keeping and using MTD-compatible software to provide HMRC updates and returns digitally. HMRC continues to work with the MTD Accessibility Working Group and the Additional Needs Working Group to support all customers.

Businesses that are already exempt from engaging with HMRC through other mandatory digital channels will be exempted from the MTD requirements. Where a business is not already exempt from engaging with HMRC digitally, they may request that HMRC consider an MTD exemption so they will not have to meet the MTD requirements. The exemptions under MTD mirror the VAT online filing exemption. MTD exemptions have operated successfully since the introduction of MTD for VAT businesses with taxable turnover in excess of the VAT threshold since April 2019.

HMRC will continue to ensure that clear guidance is provided and information is easily accessible for digitally excluded taxpayers about the exemption process. Taxpayers may apply to be exempted from MTD requirements through non-digital means, for example in writing or by phone.

To ensure the widest possible access to software that will meet MTD requirements, HMRC is working closely with software developers to make sure that there are several software products that cater for those with cognitive, motor, visual and hearing difficulties. Where a person already complies with requirements to send information electronically and uses assistive technology, the MTD requirements should not impose additional costs to meet their accessibility needs.

For those moving to digital, especially those needing extra support, HMRC’s customer support model includes:

  • a multi-layered approach stretching across agents, third party software support, through to telephony support, webchat, and HMRC’s Extra Support service

  • accessible online content including recorded Webinars, YouTube videos and E-learning

  • GOV.UK content including Help pages; signposting to information, guides, and to local or third-party providers of digital skills courses, or support already provided by external providers

HMRC will also continue to work across multiple channels supporting as many taxpayers as possible to move onto digital services.

HMRC has not identified any impacts on other groups sharing protected characteristics.

Impact on business including civil society organisations

Who is affected

This measure is expected to have an impact on approximately 4.2 million unincorporated businesses, individuals and civil society organisations with trading and/or property income over £10,000.

The Government recognises that the population that will be affected is diverse. This includes around 2.6 million self-employed individuals, around 1 million landlords, over 250,000 ordinary partnerships, and about 380,000 businesses with income from different sources (for example, both self-employment and property).

Business incomes also vary throughout the affected populations. Based on 2018/19 Return data 3.4 million of those businesses and individuals mandated for MTD ITSA have business and / or property income between £10,000 and £50,000, 460,000 between £50,000 and the VAT threshold and 350,000 above the VAT threshold.

Costs

HMRC estimates a transitional cost to business of around £1,383m and a net increase in the ongoing costs of tax compliance of around £152m for those businesses mandated to use MTD ITSA. This equates to an average transitional cost of £330 and an annual cost of £35 per business within scope.

Businesses within scope already operating MTD VAT or using digital tools for business administration may incur relatively little cost, where other, less digitally capable businesses, may be more affected by one-off transitional costs as they move to MTD processes.

In assessing these impacts, HMRC has incorporated findings from the businesses already signed up to MTD, as well as feedback from engagement with external stakeholders about their experience of the costs to businesses in complying with MTD. In particular, HMRC has worked extensively with stakeholders from the accountancy, business and software communities to update its assumptions underpinning the cost estimates, to ensure they are robust and a realistic representation.

Standard Cost Model (SCM) methodology was used to estimate administrative burden impacts. This methodology allows HMRC and HMT to apply a standard set of principles for estimating administrative burdens across all impact assessments. The assessment only considers the costs and savings strictly related to meeting MTD tax obligations. It does not include the wider benefits that HMRC expects businesses may see and does not reflect the broader picture of taxpayer experience and cannot measure all consequential and longer-term benefits. The SCM only captures the costs to business of retaining and/or disclosing information to HMRC or to third parties and therefore cannot be used to estimate wider benefits of MTD to businesses.

Costs invariably will differ from business to business and are influenced by factors including size and complexity of business, degree of digital capability and cost and functionality of software solution employed.

Transitional one-off costs could include some or all of the following:

  • time spent in familiarisation with the new MTD obligations (digital record keeping and quarterly submission of information)
  • in-house training
  • the purchase of new hardware or upgrading of existing hardware (expected to affect a small minority)
  • additional accountancy or agents’ costs

Transitional costs can be offset against the business’ profits for tax purposes.

Continuing costs could include:

  • cost of software subscription for those moving to MTD compatible software, from either paper or spreadsheet systems (although for the smallest businesses with the most straightforward affairs the government expects free software will be available)
  • additional time for making quarterly updates (ITSA businesses and landlords only)
  • any cost of bridging software to provide MTD compatibility for those who prefer to continue using spreadsheets
  • marginal increases in some existing software costs to provide MTD compatibility

Greater detail on customer costs and benefits, and the likely impact on businesses and individuals can be found in the accompanying paper Making Tax Digital (MTD) – Customer Costs and Benefits for the Next Phases of MTD.

Benefits

Alongside the costs of making the transition to MTD, there are significant wider benefits and cost efficiencies available for many businesses as part of going digital, once they have moved to digital record keeping, such as productivity and efficiency. Some, but not all, of these are measurable in cost terms. For businesses, these benefits may offset wholly, or in part, any costs of complying with MTD.

Once businesses are used to operating the new MTD processes, HMRC anticipates that they will find that MTD makes it easier for them to get their tax right first time and reduces errors, making the management of tax affairs simpler. HMRC expects this to in turn improve businesses’ experience of dealing with the department. MTD also has the ability to support business efficiency and productivity through the use of digital channels.

HMRC projects that these changes will also have positive impacts on agents acting for businesses. Businesses may find MTD software means that they can do more in relation to recordkeeping and tax. Some businesses that currently use agents, and are recording income and expenditure digitally, may choose to make the ITSA quarterly updates themselves. For ITSA businesses, with software categorisation of income and expenditure, final end of period activity should be a simpler process than it currently is for a business maintaining their books and records on paper. Routine work will be done automatically. This will allow both agents and their clients to focus on higher value business activities.

Digital record keeping requirements

Through MTD, businesses and landlords will be required by law to keep digital records. This will involve a transitional cost for businesses not already doing this. They will need to purchase, or acquire a free version of, software and become accustomed to using it. Civil society organisations may potentially see an increase in requests for help and support from less digitally engaged individuals and business in transitioning to the new requirements. HMRC has been working with the software industry to ensure that businesses needing to update their accounting systems will have access to affordable software products. The government has committed to there being free software products for the smallest businesses with straightforward affairs.

When MTD VAT was introduced, more than 250 existing subscription VAT software products were updated at no cost to customers to provide MTD VAT capability. The industry has also provided a number of free-to-use products, despite there being no requirement for the software industry to offer free VAT products. We expect to see a similar positive response from the software industry to the mandation of MTD ITSA, bringing choice to the market and competitive pricing.

These measures are expected to improve businesses’ experience of dealing with HMRC as managing their tax affairs will be simpler. Once businesses are used to operating the new MTD processes, we anticipate that they will find that MTD makes it easier for them to get things right and reduce errors. Further detail on customer costs and benefits, and the likely impact on individual businesses can be found in the accompanying paper Making Tax Digital (MTD) – Customer Costs and Benefits for the Next Phases of MTD.

Estimated one-off impact on administrative burden (£million)

One-off impact £(million)
Costs 1383
Savings -

Estimated continuing impact on administrative burden (£million)

Continuing average annual impact £(million)
Costs 260
Savings 109
Net impact on annual administrative burden +152

Operational impact (£million) (HMRC or other)

There will be both IT and resource costs for HMRC in developing, applying and policing this measure, and in updating guidance.

HMRC IT and non-IT costs for the next phases of MTD expansion (MTD VAT and ITSA) are expected to be in the region of £362 million

Other impacts

Justice impact test and rural proofing: HMRC is required to consider these proposals in relation to their impacts on rural communities and the justice system. HMRC’s assessments suggest any impact is likely to be negligible. Mitigations are in place for those whose rural location impacts their internet access to the point where it is not feasible to operate MTD, as discussed above under ‘Equalities impacts’

Other impacts have been considered and none have been identified.

Monitoring and evaluation

The measure will be kept under review through communication with affected taxpayer groups. In place are comprehensive evaluation and benefit realisation plans to monitor the impact of the changes and provide evidence of benefit delivery.

Further advice

More information on the MTD Customer Cost and benefits estimates can be found at Making Tax Digital (MTD) – Customer Costs and Benefits for the Next Phases of MTD.

If you have any questions about this change, contact Ady Garrett by email at:makingtaxdigital.consultations@hmrc.gov.uk.