The introduction of Making Tax Digital for Income Tax originally scheduled for introduction 6 April 2024 for self employed and landlords will be delayed until at least April 2026. In what many saw as an early Christmas present, just before Christmas, Victoria Atkins, Financial Secretary to the Treasury, after weeks of speculation, confirmed in a written statement to Parliament that the rollout of MTD ITSA mandation would be delayed.
In addition to this, from April 2026 the regulations will only initially apply to self employed or landlords who have an income above £50,000 with such businesses with income over £30,000 being mandated to comply with MTD ITSA a year later from April 2027. This is a welcome concession as originally those with income over £10,000 were affected.
It was also originally planned that MTD ITSA would apply to partnerships from April 2025. This will no longer happen and the Government intends to introduce MTD ITSA for partnerships at a later date yet to be announced.
Whilst the changes in the mandation to MTD ITSA are welcome, and gives businesses more time to plan, nevertheless action is required now for unincorporated businesses who do not have a 31 March or 5 April year end. This is because the basis period reform announced as part of the preparation for MTD ITSA will still come into effect from 6 April 2023 as originally announced. Under these plans business profits will move from being assessed under a current year basis (based on the accounting year end which ends in that tax year) to a strict tax year basis. The transition to a tax year basis was scheduled for 2023/24 and indeed these regulations will still proceed as planned. Whilst it is possible to spread the effect of basis period reform over a period of up to 5 years, businesses could see an increase in their tax bill at a time when the UK is facing a cost of living crisis and therefore careful planning is required for affected businesses.
For example, John a sole trader usually makes his accounts up to 30 June each year. His 2022/23 tax return is therefore based on the current rules on the accounts ending in that period, ie year ended 30 June 2022.
For 2023/24, John will have two periods falling within this tax year to be assessed on his 2023/24 tax return, namely the 12 months ended 30 June 2023 plus the nine months ended 5 April 2024. You can see therefore for 2023/24, subject to any historic overlap relief that may be available, John will effectively be assessed on 21 months’ worth of profit.
Whilst there is transitional relief available with the five year spreading provisions the impact on each tax payer will be determined to some extent on any overlap relief available and future business plans for say example imminent retirement so careful planning is required so clients are aware of the changes and can structure their affairs as tax efficiently as possible.
Please note the above regulations do not impact on limited companies only unincorporated businesses and landlords are affected.
We have been advising clients for some time regarding the impact of these transitional rules and we will be in contact with all clients affected in the next few weeks to discuss further.
If you have any queries on this please do not hesitate to contact either the Director or Client Manager in charge of your affairs.