Further draft legislation on MTD ITSA published

HMRC have published four draft Notices providing more details on the Making Tax Digital for Income Tax proposals.

HMRC have published four draft Notices providing more details on the Making Tax Digital

On 1 July 2022, HMRC published four draft Notices which provide further details on the operation of Making Tax Digital for Income Tax self-assessment (MTD ITSA) which is due to come into effect from April 2024. The Notices contain limited information, mainly focused on the ‘categories’ of income and expenditure which will need to be reported in quarterly returns. HMRC have committed to publishing guidance “to explain how customers can reflect any accounting and tax adjustments that may be required to reconcile the quarterly submissions to the final taxable profits for the year” later in the year. HMRC are requesting comments on this draft tertiary legislation by 28 July 2022.

The draft Notices have been published under powers provided within The Income Tax (Digital Requirements) Regulations 2021 which provide the legislative framework for MTD ITSA. Those regulations make it clear that taxpayers within the scope of the new rules will have to keep digital records of each transaction including details of which ‘category’ the transaction falls within. One of the new Notices (“Update notice – made further to regulation 8”) lists out what these categories are for the two types of unincorporated businesses within the scope of MTD ITSA: businesses with trading profits and businesses with property income (above the threshold of £10,000).

This draft Notice makes it clear that taxpayers will need to provide the “totals of the amounts falling within the categories of transactions” within quarterly returns. The Notice provides a relaxation for businesses with turnover below the VAT registration threshold (currently £85,000) who “may choose to provide the total of all income and the total of all expenses instead of the totals of the amounts falling within each category of transaction listed in this Update Notice”. This effectively allows these taxpayers to continue to report using the simplified ‘three line accounts’ approach available under ITSA currently.

A second draft Notice (“End of Period Notice – made further to regulation 12”) lists out the additional information that must be submitted at the end of the accounting period for each source of income within the scope of MTD ITSA. These are, in essence, the tax adjustments that will need to be made to the accounting profits to calculate the taxable profits for each business.

The remaining two draft Notices cover:

  • Specific rules for retailers to allow them to record daily gross takings rather than each sales transaction separately; and
  • Confirmation that records must be maintained digitally within ‘functional compatible software’ from the point a transaction is entered through to the returns submitted to HMRC - this is commonly referred to as the ‘digital links’ requirement.

The details of these draft Notices are going to be of most interest to software companies developing functional compatible software, but taxpayers who are intending to keep their digital records in spreadsheets should also ensure they are familiar with the details and feedback any comments to HMRC. 

Please speak to your normal KPMG in the UK contact if you have any questions or concerns about these draft Notices or any other aspects of MTD ITSA.