Last week the UK government announced that MTD for income tax self- assessment (“ITSA”) is being delayed one year from April 2023 until April 2024. Basis period reform is also delayed one year and transitional measures will not now commence until April 2023 at the earliest. Both of these delays are in recognition of the challenges faced by many UK businesses as the country emerges from the pandemic. Chartered Accountants Ireland wrote at the end of last month to HM Treasury calling for basis period reform and MTD for ITSA to each be delayed at least one year - the Institute’s input into the Government’s decision to defer is acknowledged in a letter from the new Financial Secretary to the Treasury, the RT Hon. Lucy Frazer who also made a statement in Parliament confirming the decision. The delay to both of these measures is welcomed and demonstrates that the Government has listened to the recommendations of this Institute and other stakeholders. As a result of the delay to MTD for income tax, general partnerships will not be required to join MTD for ITSA until April 2025. The date at which all other types of partnerships will be required to join will be confirmed later. Regulations have been laid in Parliament setting out the design and scope of MTD for ITSA and a Tax Information and Impact Note has also been published in addition to a Policy Paper designed to help different businesses understand what their transition to MTD could look like in more detail. In addition, changes to the basis period rules will not come into effect before 2023/24. This was also a recommendation of the Institute in its response to that consultation. The Government’s response to that consultation will be published in due course. At Spring Budget, the Government announced a new system of penalties for the late filing and late payment of tax for ITSA. This will now be introduced for those who are mandated for MTD for ITSA in April 2024, and for all other ITSA taxpayers in April 2025. A news release covering last week’s announcement is also available. HMRC has also updated a number of relevant publications as follows:- Making Tax Digital for Income Tax for businesses: step by step; Check if you're eligible for Making Tax Digital for Income Tax; Making Tax Digital for Business - stakeholder communications pack; Customer costs and benefits for the next phases of Making Tax Digital; Check when to sign up for Making Tax Digital for Income Tax; Find software that's compatible with Making Tax Digital for Income Tax; Apply for an exemption from Making Tax Digital for Income Tax; Using Making Tax Digital for Income Tax; and Extension of Making Tax Digital for Income Tax Self-Assessment to businesses and landlords

HMRC has published ‘Measuring tax gaps: 2021 edition’, which provides information on the 2019/20 tax gap - the difference between the amount of tax that should, in theory, be paid to HMRC, and what is actually paid. 2019/20 was the first year of Making Tax Digital (“MTD”) for VAT, which according to HMRC should reduce VAT errors. One would therefore expect to see a reduction in the VAT tax gap in 2019/20. However the VAT gap has increased from 7.0 percent in 2018/2019 to 8.4 percent in 2019/2020. It is questionable therefore if MTD for VAT is achieving its objective and this also calls into question the Government’s plans to further extend MTD for VAT in April 2022 as this is premised on MTD leading to a reduction in errors made. The Government’s recent decision to delay MTD for income tax self-assessment is therefore the right one in the context of both the tax gap data and the pressure on businesses as a result of the pandemic. According to the report, the overall tax gap is estimated at 5.3 percent, or £35 billion in cash terms, an increase from 5.0 percent (£33 billion) in 2018/19. Overall, there is a long-term downward trend in the tax gap, falling from 7.5 percent in 2005/06 though between 2016/17 and 2019/20 the overall percentage tax gap has remained relatively stable. Any impact of the COVID-19 lockdown and economic downturn on the tax gap is likely to be seen in the tax year 2020/21 in ‘Measuring tax gaps 2022’ edition. In ‘Measuring tax gaps 2021’ there is no material impact. For the first time HMRC have also published an uncertainty rating for each component of the tax gap.  The number of individual components where HMRC has published ranges of the tax gap has also been extended.

Read the latest on Making Tax Digital in the most recent update from HMRC for August 2021. Readers are advised that this update was written and sent to us before the recent decision to delay the commencement date of MTD for income tax self-assessment from April 2023 to April 2024.