What are the basic requirements for MTD ITSA?
There are four requirements for MTD ITSA (draft reg 3):
record business transactions in a digital manner
preserve those records for the defined period
provide a quarterly update to HMRC
provide an end of period statement (EOPS) to HMRC
The records in 1) and 2) comprise data needed to populate the reports required for points 3) and 4), which in turn must be submitted using MTD-compatible software.
The digital means for recording the data does not have to be the same software that submits the data. However, there should be a digital link between the recording software and the submission software.
What exactly must be recorded?
Each transaction must have these data points recorded digitally:
the date of the transaction – the exact time is not required
for expenses – the category out of the specified list of expenses (see below)
for income – the trade or property business the income relates to
the amount or value.
Retail businesses will be able to elect to record daily gross takings rather than every single transaction (draft reg 17), but only if it would be unreasonable for the business to keep digital records of every individual sale.
In addition, the business will have to record the following permanent information as part of its digital records:
∙ the business name
∙ the address of the principal place of business
∙ whether it uses cash accounting or accruals accounting
Can the client give their accountant paper records to enter into software?
The taxpayer does not have to record the business data digitally themselves. They can pass this task over to a bookkeeper or to their accountant to make the entries into accounting software, or a spreadsheet.
Although the aim of MTD is to encourage businesses to record their business transactions in real-time, as they occur, there is nothing in the draft regulations that stipulates exactly when the data must be committed into the digital record. As long as the data for the quarter is recorded before the quarterly submission is compiled and sent to HMRC, there is nothing to prevent a bulk recording of transactions every few weeks or months.
However, the longer the delay between the transaction and being recorded digitally, the greater the risk of loss or corruption of data – which is the whole point of MTD (as HMRC would argue).
Can a spreadsheet be the first entry for digital records?
A spreadsheet can be the entry point for transactional data into the accounting system. However, once that data has been recorded, the MTD regulations stipulate that there should be “digital links” that move the data around the accounting system. This means the data should not be retyped or copied by human hand once it has entered the system.
Think about where the accounting system starts. That is the point the transaction (sale or purchase) is recorded. It may be convenient to capture transactions using optical character readers, or bank feeds, but that doesn’t have to be the entry point of all the data.
A business can still issue paper invoices if the information from that invoice is digitally recorded in the accounting system.
What information is required to be submitted quarterly?
The quarterly submissions will be the totals for the quarter of:
sales income for each trade
purchases/expenses for each category
The categories of expenses are expected to be the same as those currently required in the self-employment section (form SA105) and property section (form SA103F) of the self-assessment tax return. More detail will be set out in the final MTD ITSA regulations.
In essence, the quarterly submission is a rough profit and loss account, no balance sheet figures are required. The data for individual transactions are not required.
Can the accountant make changes in the final submission?
This quarterly data dump does not have to be accurate, any misallocation between expense categories can be adjusted at the end of the period statement (EOPS).
It is in the EOPS that the accountant can make any adjustments for capital allowances, losses, reliefs, disallowable expenses, transactions that have been missed or double-counted.
One EOPS will be required of each trade or property business by 31 January following the end of the tax year.
Can the taxpayer submit estimated figures on the quarterly submissions?
Yes, if the taxpayer wishes to submit estimated expense figures, or even only the income amounts, in the quarterly submissions, that would be acceptable within the current draft MTD regulations.
To avoid the risk of a penalty for late filing some form of data needs to be submitted each quarter.
The quarterly submissions do not contain an accuracy statement. The taxpayer (or accountant) is not required to declare that the quarterly submission is a complete or correct reflection of the net or gross income of the business.
The taxpayer must make a declaration of accuracy on the EOPS, once all the adjustments for the four quarters have been made.
What will HMRC do with the quarterly data?
The quarterly submission will be used by HMRC to calculate an estimate of the business’s tax liability throughout the year, and that figure will be reflected back to the taxpayer. This is likely to confuse rather than assist the taxpayer as the current timing of tax payments will not be changed (for now).
Will tax payments change to quarterly?
Earlier this year there was a Call for evidence: timely payment, which asked for ideas on how the payment of income tax under self assessment, and corporation tax for small companies, could move to more frequent payment dates based on in-year calculations.
This article is based on the very limited guidance produced so far by HMRC. The final regulations for MTD ITSA are expected to be published in October 2021.