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Making Tax Digital Expands

Written by admin on . Posted in Landlord, Making Tax Digital, MTD, self-assessment. No Comments on Making Tax Digital Expands

Self-employed people and landlords with an income between £20,000 and £30,000 will be required to use Making Tax Digital (MTD) from 6 April 2028. This will bring a further 900,000 low-income taxpayers under the MTD regime.

HMRC previously stated that those with an income between £20,000 and £30,000 would be mandated before the end of this parliament. The specific start date of April 2028 is therefore earlier than expected.

Timing

Taxpayers with an income of more than £50,000 will be mandated from 6 April 2026 for the 2026/27 tax year. The deadline for finalising MTD obligations for this year is not until 31 January 2028, which doesn’t give HMRC much time to sort out any problems before the new cohort of taxpayers join the system in April 2028. At present:

  • Unrepresented taxpayers with an income between £20,000 and £30,000 are going to need software that is either free or low-cost.
  • The availability of such software is quite limited, although more options might become available by April 2028.

The relevant income for meeting the £20,000 threshold will be that for the 2026/27 tax year.

In the future, the MTD threshold might be lowered again as the government has stated there are plans to expand the regime to include those with an income below £20,000.

Self assessment

HMRC has also announced that the year-end self assessment tax return must be submitted using MTD or other suitable software. It was previously thought that taxpayers would be able to use HMRC’s online service, but this is not going to be the case.

When selecting suitable MTD software, it is important to make sure it can also deal with the tax return submission. If the MTD software cannot do this, a different software package will be required to complete the year-end requirement.

HMRC’s list of software that’s compatible with MTD for income tax can be found here.

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What’s new on MTD?

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A busy start for HMRC on Making Tax Digital (MTD) for 2025 with focus falling on new guidance for three-line accounts and joint property income.

Self-employed individuals and landlords with an annual income of more than £50,000 will start using MTD from 6 April 2026. The £50,000 test is based on overall self-employed and property income for the current 2024/25 tax year.

Three-line accounts

HMRC has confirmed a three-line account approach:

  • Currently, when completing a self-assessment tax return, self-employed individuals and landlords whose income from either self-employment or property is below the VAT registration threshold of £90,000, need only enter one figure for total expenses.
  • Therefore, keeping digital records for MTD should be a matter of classifying amounts as either income or expense.
  • Each quarter, only the total income and expense figures will be submitted to HMRC.

The one exception is when a landlord incurs residential finance costs, which must always be recorded separately because they are not a deductible expense.

Joint property income

Joint property owners only need to record their share of the property’s income and expenses. If a landlord chooses to, they can simply record income on a quarterly basis and expenses on an annual basis at the end of the tax year. Individual transactions will not have to be captured; only a total figure for each income and expense category.

If the joint property owner is eligible to use a three-line account approach, it gets even simpler. A total quarterly income figure and a total expenses figure at the year end. Recording and reporting will then be:

  • Each quarter: record a single income figure and submit to HMRC.
  • End of the tax year: record a total figure for expenses and report through the end-of-year finalisation process.

HMRC’s guidance on the categories of income and expenses that need to be included in quarterly updates (if a three-line account approach is not used) can be found here.

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Making Tax Digital latest

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Although Making Tax Digital (MTD) for the self-employed and landlords is still more than a year away, the October 2024 Budget further extended its scope with the announcement that it will apply to those with income between £20,000 and £30,000 before the end of this parliament.

MTD timeline

With the latest announcement, the MTD timeline for the self-employed and landlords now looks like this:

  • 6 April 2026: Those with an income of more than £50,000 for the 2024/25 tax year.
  • 6 April 2027: Those with an income of between £30,000 and £50,000 for the 2025/26 tax year.
  • Before the end of this parliament: Those with an income of between £20,000 and £30,000 for the tax year prior to the year of mandation.

It is very important to appreciate that the various mandation levels are based on gross income, and not on net profit after expenses have been deducted.

More significant than what was actually announced was what was left unsaid: that the government appears to be fully committed to the implementation of MTD from April 2026 without any further postponement.

Outstanding issues

One of the main concerns is that the testing of MTD by HMRC is still relatively small scale. Until recently, there was a lack of compatible software and a long list of exclusions of those who cannot currently sign up to use MTD voluntarily, e.g.:

  • those paying the high income child benefit charge;
  • anyone claiming the marriage allowance; and
  • those with income from a trust or jointly owned property.

There is still no confirmation on how MTD will work in practice for those with jointly owned property. At issue is that each owner will be expected to keep their own digital records and submit separate quarterly updates – something that will be impractical in many cases.

HMRC’s guidance on if and when you will need to use Making Tax Digital can be found here.

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Daily penalties come in for late self assessment returns

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Around 1.1 million taxpayers who failed to submit the self assessment tax return for 2022/23 on 31 January 2024 now face a £10 daily penalty charge by HMRC.

HMRC has imposed a daily penalty of £10, effective from 1 May 2024, on late submissions. The penalty can run for 90 days, reaching a potential fine of £900 and is charged even if nothing is owed to HMRC, or a tax refund is due. Separate penalties, along with interest at the high rate of 7.75%, are charged for paying tax liabilities late.

What to do?

  • Submit an online tax return as soon as possible. This will not avoid penalties up to the date of submission but will prevent further fines accumulating.
  • If there is information missing for 2022/23, submit a provisional return with estimated figures. The return should note which figures are provisional, why accurate figures are not available, and when accurate figures will be provided.
  • HMRC will cancel penalties already charged if they have asked for a 2022/23 tax return in error. For example, if you have ceased self-employment or no longer rent out property.

HMRC can cancel a tax return within two years of the submission deadline, which means there is time to have a return for 2022/23 cancelled by 5 April 2025.

Reasonable excuse

You can appeal against the daily penalty if you can demonstrate a reasonable excuse, such as prolonged ill-health or bereavement. However, work pressure, lack of information or missing reminders from HMRC are unlikely to be accepted.

The challenge with appealing against the daily penalty is providing HMRC with a credible excuse running from the original filing date (31 January) through to the issue of penalties (from 1 May).

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Making Tax Digital Update: Small Business Review

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The outcome from the Making Tax Digital (MTD) small business review is that MTD for income tax self-assessment (ITSA) will not be extended to those earning under £30,000 for the foreseeable future.

MTD ITSA for the self-employed and landlords is to be introduced from April 2026, with the initial mandate applying to those with income over £50,000. Those with income between £30,000 and £50,000 are set to join from April 2027.

The government said it would review the needs of smaller businesses – those with income under the £30,000 threshold ­­– before extending MTD further. The latest announcement means there will be no extension, although the decision will be kept under review.

There is no set mandation date for general partnerships (those with individuals), non-general partnerships (those with a corporate partner) and limited liability partnerships.

An important point to note is that the £30,000 and £50,000 limits apply to total self-employment and property income, and not to the profits actually made.

Reporting

Some reporting changes have also been announced:

  • Year-end reporting was originally going to consist of two separate steps – an end of period statement and a final declaration. This would have caused considerable confusion, so there will now be just the one final declaration; and
  • Quarterly reports are now to be cumulative, so any errors will simply be corrected on the next report – rather than the previous requirement to resubmit past quarters.

Ongoing concerns

Despite the latest attempt to simplify the MTD process, there are still concerns that HMRC has simply lost sight of the needs of taxpayers. A recent House of Commons committee report criticised the project’s spiralling costs, design flaws and missed deadlines.

The report recommends HMRC research what business taxpayers would actually find most helpful, and to take into account the substantial costs of implementing MTD.

HMRC’s guide to using MTD ITSA can be found here.

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Incoming NIC reforms for the self-employed

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National insurance contribution (NIC) changes for the self-employed announced in the Autumn Statement come in from 6 April 2024 and will be welcome news. But the reforms don’t go far enough to offset the continuing cost of frozen tax thresholds.

NICs classes

The self-employed currently pay two classes of NICs:

  • Class 2 NICs are at a flat weekly rate, and it is these contributions that give entitlement to contributory benefits, such as the state pension (35 qualifying years being required to receive a full pension). Class 2 NICs are deemed to be paid if profits are between £6,725 and £12,570, and can be paid voluntarily if profits are lower.
  • Class 4 NICs are earnings related. The main rate of 9% is paid on profits between £12,570 and £50,270, with an additional rate of 2% on profits in excess of £50,270.


Class 2 voluntary only

From 6 April 2024, any self-employed person with profits of £6,725 or more will be entitled to contributory benefits without having to pay class 2 NICs – an annual saving of £179 for those who would otherwise have had to pay.

However, those with profits below £6,725, will still have to pay voluntarily if they wish to maintain access to contributory benefits.

Anyone with profits just below £6,725 might decide to forego claiming sufficient expenses to meet the income limit, although the overall tax impact of doing so must be considered.

Class 4 reduced

From the same date, the main rate of class 4 NICs will be reduced from 9% to 8%, representing a maximum annual saving of £377. The additional rate of 2% is unchanged.

There are also no changes to the thresholds of £12,570 and £50,270, although this will be beneficial for anyone with profits in excess of £50,270 – it means no increase to the amount of profits charged at the main rate rather than at the lower additional rate.

HMRC’s guide to voluntary national insurance can be found here.

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NIC changes from 6 April 2024 will be welcome news for the self-employed, although the reforms don’t go far enough to offset the continuing cost of frozen tax thresholds.

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Tax gap at all-time low

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The tax gap is the difference between the amount of tax that should, in theory, be paid to HMRC, and what is actually paid. For 2021/22, the gap was at an all-time low of 4.8% (or £35.8 billion), although in monetary terms the gap increased by some £7 billion from 2020/21.

Small businesses

Recently published figures from HMRC show that small businesses now account for the largest share of the tax gap, at 56% of the total or just over £20 billion. This percentage has grown steadily from 40% in 2017/18. By comparison, the share for mid-sized and large businesses has fallen from 18% to 11% over the same period.

There isn’t sufficient information to understand what is happening here, but there are a couple of possibilities:

  • Having endured the challenges of the Covid-19 pandemic and now facing an equally tough economic climate, small businesses may be under-declaring income or, more likely given most sales are now done electronically, overclaiming on expense deductions.
  • At the same time, HMRC now lacks the resources to carry out extensive tax investigations.

And, of course, having an extremely complex tax system doesn’t help.

The whole concept of the tax gap has been subject to criticism, especially as HMRC does not explain how figures are calculated.

Making Tax Digital (MTD)

HMRC has been accused of using the tax gap to push their own agenda, in particular, making a case for MTD.

MTD for the self-employed and landlords is now not set to start until April 2026. MTD for VAT has been introduced in stages since April 2019, with virtually all VAT-registered business now included. The tax gap for VAT, although showing some improvement since 2018/19, doesn’t exactly support the need for MTD – the VAT gap fell from 6.4% in 2018/19 to 5.4% in 2021/22.

HMRC’s press release on the latest tax gap figures, along with more detailed information, can be found here.

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Making Tax Digital delayed once more

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With the self-employed and landlords facing a challenging economic environment, the government has again delayed the introduction of the Making Tax Digital (MTD) scheme for income tax self-assessment (ITSA) – this time by two years until April 2026.

Although the introduction of MTD ITSA prompted the basis period reform, no corresponding postponement for this has been announced. The tax year 2023/24 is therefore still the transitional year.

Income reporting threshold

Along with the two-year delay, the minimum income reporting threshold has also been raised.

  • Rather than an income threshold of £10,000, MTD ITSA will now initially only be mandated – from April 2026 ­– for a self-employed individual or landlord who has income of more than £50,000.
  • Those with income between £30,000 and £50,000 will join a year later from April 2027.
  • The government will review the needs of smaller businesses – particularly those with income under the £30,000 threshold – before making further decisions.

Given the low level of awareness of the MTD reporting requirements, the entry point U-turn will be widely welcomed, especially by landlords for whom MTD will have few benefits. Previously, the introduction of MTD ITSA was going to impact on some four million taxpayers, but only 700,000 will now be involved from April 2026, with a further 900,000 included a year later.

Partnerships and companies

General partnerships (those with only individuals) were previously set to start reporting under MTD ITSA from April 2025.

  • With the revised timetable, there is no set mandation date for general partnerships.
  • Non-general partnerships (such as those with a corporate partner) and limited liability partnerships were previously excluded from the MTD timeline, and this remains the case.

A self-employed individual who wishes to avoid MTD reporting requirements can easily (at least initially) do so by converting to a partnership with the addition of a spouse, partner or other family member as a partner.

The government announcement makes no mention of MTD for corporation tax, so this is unlikely to be introduced any time soon.

Information for those who wish to voluntarily sign up for MTD ITSA before 6 April 2026 can be found here.

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Meandering thoughts on Capital gains chop in Autumn Statement

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It should have come as no real surprise that the Chancellor took the axe to relief on capital gains tax (CGT) in the government’s Autumn Statement. The changes are expected to raise some £1.6 billion over the next five years by cutting the annual exempt amount (AEA) to £6,000 for 2023/24, and following this by a further, drop down to £3,000 from 2024/25.

The AEA is currently £12,300, so someone with, for example, gains of £20,000 to £25,000 from the sale of shares will have been advised to spread the disposals over two tax years to benefit from two AEAs. With an AEA of just £3,000 from 2024/25 onwards, a disposal would need to be spread over seven or eight years to fully eliminate the gain.

Instead, many investors may prefer to take the full tax hit from an early disposal, especially if they have concerns that CGT rates could be the next target. For a higher or additional rate taxpayer disposing of a buy-to-let property, for example, the reduction of the AEA to £3,000 will mean an additional £2,604 in CGT.

The AEA available to trustees is half the normal level, so for 2023/24 they will have an AEA of £3,000, with £1,500 available from 2024/25.

Reporting requirements

With a lower AEA, more individuals and trusts will find themselves having to report gains to HMRC. The estimate is that by 2024/25, an additional 260,000 people will be brought into the scope of CGT for the first time.

This will mean filing a self-assessment tax return or making use of HMRC’s real-time CGT service. Dealing with CGT can be a challenge given the complex computational rules and reliefs, plus the one-off nature of the tax.

CGT planning

The reductions to the AEA make planning around capital gains more important than ever.

  • Consider utilising the current, more generous, AEA by 5 April 2023.
  • Make use of ISAs to shelter gains from CGT.
  • Ensure the best use is made of any capital losses – these can be wasted if crystalised in a later tax year to gains.
  • Spouses and civil partners can transfer assets between themselves to make the best use of exemptions and capital losses.
  • Look at whether holding buy-to-let property in a company structure is beneficial.

HMRC’s guide to reporting and paying CGT can be found here. For detailed guidance on your options, please get in touch.

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Making Tax Digital: avoiding VAT penalties

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From 1 November 2022, VAT-registered businesses that do not yet comply with the Making Tax Digital (MTD) requirements will face penalties. Businesses should also be aware of the new VAT penalty regime being introduced from 1 January 2023.

Although VAT-registered business should already be submitting their VAT returns using MTD compatible software, they have until now been able to continue using their VAT online account without incurring a penalty. However, for those businesses filing their VAT returns monthly or quarterly, this option will no longer be available, making it impossible to file other than by using MTD software.

HMRC has said that a business filing annual VAT returns can continue to use their VAT online account until 15 May 2023.

Around 10% of businesses filing returns using the correct MTD software have not yet signed up for MTD with HMRC but will need to do so to avoid a penalty.

Penalties

The maximum penalty for filing a VAT return using the incorrect method is £400, but only £100 if a business’s turnover is below £100,000.

Any business that is not signed up for MTD will also be at risk of incurring penalties under the new regime applicable for VAT return periods beginning on or after 1 January 2023:

  • Interest, currently set at 4.75%, will be charged from the due date.
  • Late payment penalties will kick in, initially at 2% of the outstanding VAT, once payment is more than 15 days late.
  • Late submission penalties will be charged under a points-based system, with an initial £200 penalty charged if four quarterly returns are late.

Having a reasonable excuse might provide a potential escape route, but failure to use MTD software is hardly likely to count.

HMRC’s guidance on how to avoid penalties for MTD for VAT can be found here.

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