MTD for Income Tax postponed: Everything you need to know

Making Tax Digital for Income Tax has been postponed until April 2024.

Sometimes known as MTD for Income Tax Self Assessment (ITSA), it had been due to become law in April 2023 and would have affected more than four million self-employed people and landlords that have business/property income above £10,000.

The government has also announced that the proposed basis period changes and the new MTD-focused penalty system have a postponed implementation date.

In this article, we feature details about the postponement of MTD for Income Tax and highlight why business owners shouldn't wait for the new legislation to come into force to start taking a digital approach.

Here's what we cover:

What is MTD for Income Tax's postponed start date?

Why has the MTD for Income Tax start date been delayed?

Have the basis period reforms been postponed?

Has the new MTD penalty points system been postponed?

Will there be an extension to the MTD for VAT deadline for those below the VAT threshold?

Has MTD for Corporation Tax been postponed?

Does the delay mean Making Tax Digital is dead?

Do I still have to worry about MTD for Income Tax?

3 reasons why you don't have to wait for MTD for Income Tax for your business to get ahead

In summary: What does the MTD for Income Tax postponement mean for me?

What is MTD for Income Tax's postponed start date?

On 23 September 2021, Lucy Frazer (Finance Secretary to the Treasury) made a statement in parliament that provided an update on Making Tax Digital.

At the same time, the government published legislation for MTD for Income Tax, and published a policy paper.

The headline announcements for MTD for Income Tax were:

• For sole traders and landlords with business/property income above £10,000, MTD for Income Tax now starts in the tax year beginning April 2024. Previously it had been slated to start in April 2023.
• For general partnerships with income above £10,000, MTD for Income Tax now starts in the tax year beginning April 2025. Previously, it had been slated to start at the same time as the general MTD for Income Tax scheme in April 2023. Other types of more complex partnerships (e.g. limited liability (LLPs), mixed or corporate) will follow at an as-yet-undisclosed time.

Why has the MTD for Income Tax start date been delayed?

The government says the following:

"The Government recognises the challenges faced by many UK businesses and their representatives as the country emerges from the pandemic over the last year […] A later start for MTD for ITSA provides more time for those required to join to make the necessary preparations and for HMRC to deliver the most robust service possible, affording additional time for testing in the pilot."

It's worth noting that the MTD for Income Tax pilot programme hasn't changed, and people can continue to sign up ahead of time provided they fit the criteria and are using compatible software.

The postponement follows a public consultation period, and subsequent announcement of basis period reforms (see below).

The latter inspired several of the UK's largest accountancy bodies to join forces to write to the government, saying in relation to the reforms alongside MTD for Income Tax:

"It is the view of the professional bodies representing a large proportion of the UK tax profession that these reforms are being implemented too quickly. We are greatly concerned that the current timetable puts the integrity of the tax system at risk."

Have the basis period reforms been postponed?

Yes.

While we await the official legislation of basis period reforms, the following has been announced:

• Basis period reform will not come into effect until April 2024, with the transition year "not coming into effect earlier than 2023". Previously the reforms had been due to take effect in the tax year 2022/23.

The basis period reforms are an attempt by the government to align business accounting periods to the tax year (6 April to 5 April).

The majority of businesses already align to the tax year, but some chose different periods for reasons such as managing tax payments more effectively.

The reforms intend to address long-running criticism of existing basis period rules but focus especially on the admin requirements introduced by MTD for Income Tax.

The administrative burden for quarterly reports for each business run by an individual is eased if all of those businesses have the same tax-year basis period.

Has the new MTD penalty points system been postponed?

Because of the postponement of MTD for Income Tax, the new penalty point system has also been postponed to that date for those that use MTD for Income Tax.

However, it will apply as of April 2022 for MTD for VAT, as originally planned.

In other words, the new penalty system will come into force as follows:

• April 2022, for MTD for VAT, alongside the expansion of MTD for VAT in April 2022.
• April 2024, for those that will use MTD for Income Tax as of the postponed April 2024 start date.
• April 2025, for all other Self Assessment individuals (regardless of whether they're using MTD for Income Tax; notably, this isn't new and the new penalty points system was already slated to apply to all Self Assessment individuals a year after it was introduced).

The penalty points system, once it's implemented, means those making late submissions would earn a penalty point, rather than getting fined instantly by HMRC.

Once a certain number of points goes beyond a threshold, a £200 penalty will be automatically applied.

For MTD for Income Tax and MTD for VAT users, this threshold is four points.

Will there be an extension to the MTD for VAT deadline for those below the VAT threshold?

There was nothing in the government statement on 23 September 2021 about the final phase of MTD for VAT, which means all VAT-registered businesses must use MTD for VAT as of April 2022 (including any that have voluntarily registered for VAT yet are below the threshold).

Therefore, we have to assume nothing has changed and there won't be an extension to the MTD for VAT deadline for voluntarily VAT-registered businesses.

Notably, legislation for this was laid before parliament on 7 September 2021, and a detailed policy paper was released, making a postponement perhaps even less likely.

Has MTD for Corporation Tax been postponed?

There was nothing in the government statement about Making Tax Digital for Corporation Tax.

However, an earlier ministerial statement reiterated that MTD for Corporation Tax will not happen before 2026.

MTD for Corporation Tax applies to incorporated businesses that, as the name implies, pay corporation tax.

The government hasn't announced many details so far but it's expected to require businesses to keep accounting records digitally that pertain to corporation tax, make quarterly summary updates of income and expenditure to HMRC, and submit Corporation Tax Returns digitally.

Does the delay mean Making Tax Digital is dead?

No.

The government hasn't changed its plans for MTD. It's simply postponed the MTD for Income Tax dates, alongside other aspects relating to this such as the basis period reform and the new penalty system.

In the parliamentary statement, the government said:

"We remain firmly committed to Making Tax Digital and building a tax system fit for the 21st century."

Do I still have to worry about MTD for Income Tax?

MTD for Income Tax remains on the radar of a significant number of sole traders and landlords.

It's simply been delayed by one year.

That's not a very long time in the world of business, and the advice from experts is that you should begin digitalising your business now, if you haven't already.

It's vital to remember that, by requiring the use of software, MTD for Income Tax offers many benefits to your business that can be transformational.

You can reduce your admin load while gaining an edge over your competition.

3 reasons why you don't have to wait for MTD for Income Tax for your business to get ahead

When it eventually comes into force, MTD for Income Tax will ensure more businesses are taking a digital approach to manage their finances.

But, despite the delay in the legislation, there's no reason why your business can't make the move to digital working now.

In fact, if you do so, your business will reap many benefits.

Here what people who have digitalised their business say are the benefits:

Always know the financial position of your business

MTD for Income Tax requires you make quarterly updates about your accounting. The goal behind this is to ensure people pay more attention to their finances.

But if you say goodbye to using paper and spreadsheets for managing your finances and move to using cloud accounting software, you can get ahead of the curve now.

By doing so, you'll always know your cash flow position, and how much money you have to operate with.

You'll also know how much tax you owe, so can plan better.

You won't need to rely on your accountant for information like this - instead, they can use their time to take on an additional business advice role for you, helping to create growth for your company.

Make fewer mistakes

Using good quality software to digitalise your accounting in time for MTD for Income Tax will mean you're more likely to get things right each and every time - and often while spending less time doing those admin tasks in the first place.

It also means you run less risk of getting on the wrong side of HMRC.

Make superior business decisions

With the use of mobile technology and good MTD-recognised accounting software, you'll be much closer to your business accounting.

Your accounting can be accessed from your pocket, in fact - just a tap away on your mobile phone, using an accounting app.

This means you can see problems coming and take action on the fly, rather than having to sit down in an office or at home during your evenings and weekends to 'do the admin work'.

Got some invoices that haven't been paid when you're expecting a large payment to go out?

You can see that as it happens and remind your creditors ahead of time, in order to avoid issues.

But it's not just problems to stay track of. You can identify opportunities too.

You can see them arising by looking at the reports and dashboards, and spotting trends in your business.

Ever noticed that your business seems to do well at a certain time of the year? Or how certain customers provide the majority of your income? Now you can discover and make the most of these opportunities.

To be clear, there's no need to wait for MTD for Income Tax to revolutionise your business life.

Investing today means you get all the benefits now, and are ready for MTD for it arrives - no matter when.

In summary: What does the MTD for Income Tax postponement mean for me?

The government says the following in its public announcement :

"A later start for MTD for ITSA gives those required to join more time to prepare and for HMRC to deliver a robust service, with additional time for customer testing in the pilot."

Further to this, those affected by MTD for Income Tax now have longer to examine their processes to discover where and how the forthcoming legislation can improve the way they work.

It's important not to let the postponement lull you into a false sense of security. If you fall within its scope, MTD for Income Tax will continue to apply to your business(es).

Two years may sound like a long time but if you have to make adjustments to your accounting (such as changing your basis period or updating your software), then these will need to be planned well in advance and could require the help of accounting professionals who are likely to be in short supply as the MTD deadline gets closer.

Those individuals that have to adjust to MTD for VAT in April 2022 will also a bit more time to make a successful jump to MTD for Income Tax - although it's worth remembering that upgrading to good-quality cloud accounting software now means you'll be equipped for MTD for VAT and ready for MTD for Income Tax ahead of 2024.

Editor's note: This article was first published in September 2021 and has been updated for relevance.

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