The staged roll-out of Making Tax Digital for income tax self-assessment (MTD ITSA) from April 2026 is welcome, but this delay throws up further questions.

Turnover threshold 

The new MTD for ITSA timeline in a nutshell

Here are the key dates you need to know when preparing for MTD for ITSA:

• Apr 2026: MTD for ITSA – businesses, self-employed individuals, and landlords with income over £50,000.
• Apr 2027: MTD for ITSA -businesses, self-employed individuals, and landlords with income over £30,000.
• Not yet time-lined:
  • MTD for ITSA for those with income under £30,000 annually
  • MTD for ITSA for general partnerships

For over six years tax professionals have been screaming into the void that a £10,000 turnover threshold for MTD ITSA was way too low.

It seems the government has finally listened, and the new MTD ITSA entry threshold will be set at annual turnover of £30,000 from April 2027. Initially a higher entry turnover threshold of £50,000 will apply from 6 April 2026.

The government says it will now commence a review into the needs of smaller businesses, and in particular those with turnover under the £30,000 threshold. This review will inform “the approach for any further roll-out of MTD for ITSA after April 2027.”

We have stressed the “any” in that statement. This implies that the £10,000 turnover threshold for MTD ITSA may be replaced with £30,000 permanently, and the roll-out of MTD to companies is now in some doubt.

The £30,000 base threshold will exclude hobby businesses and smaller landlords from MTD reporting, which is the group most likely to find MTD ITSA reporting a problem.

Step by step 

This gradual roll-out of MTD ITSA is sensible approach, but is it too rushed?

The mechanics of the quarterly reporting and finalisation of the tax year need to be live tested by businesses who are able to cope with reporting digitally. Once this works for these businesses and landlords, only then should the entry threshold be reduced to bring in the rest of the population who are potentially subject to MTD.

We know this approach works, as this is the pattern that MTD for VAT followed. But in that case, there was a three-year gap between the larger businesses (turnover in excess of £85,000) joining MTD in 2019, and the mandation of voluntarily registered VAT traders from April 2022.

When will the pilot be expanded?

HMRC says most taxpayers within the scope of MTD ITSA will be able to sign-up voluntarily before they are mandated to do so. This indicates that the MTD pilot will be expanded soon, but when?

HMRC has confirmed that the MTD ITSA pilot will not open to businesses with accounting periods that do not use 5 April year end, until 2024.

Why is quarterly reporting needed?

The minister, Victoria Atkins, made no mention of quarterly reporting in her written statement, so we must assume that this aspect of MTD reporting will remain in place.

However, the justification for quarterly reporting has never been made convincingly. If accountants cannot be persuaded that quarterly reporting is necessary, they won’t be able to sell the MTD project to their clients.

Will tax payments switch to quarterly?

Many accountants have leapt to the conclusion that the timing of self-assessment income tax payments will shift to quarterly to match the MTD ITSA quarterly reporting, but this has always been denied by HMRC.

A switch to quarterly payments was indeed suggested in the Timely payment consultation but the government’s conclusion was that no changes to income tax payment dates would be made “in this parliament”.

If the purpose of MTD ITSA is to accelerate the payment of tax, the government should be honest about this and consult fully on the details.

Why change to the tax year basis?

This MTD delay calls into question the rush to force all unincorporated businesses to report profits on the tax year basis from April 2024, with 2023/24 as the transitional year.

Around one-third of all partnerships (130,000 businesses) are affected by the shift to the tax basis, but partnerships now have a start date for MTD ITSA beyond April 2027. Switching to the tax years basis at this time is unnecessary, expensive, and will create errors in reporting.

Will the government listen to businesses and scrap the switch to the tax basis?

Will there be a proper consultation?

Paul Aplin has been a champion of using digital tools in tax compliance for years, but he is concerned about the breadth and depth of the promised review.

Aplin comments: “The review the government has now promised needs to be a full and open reappraisal of the purported benefits and inevitable burdens for very small businesses. If businesses see a clear case for digital record keeping – and in many cases, even for the very smallest businesses, there is one – they will adopt it. They should not be forced.”

Other questions 

There is a raft of other questions that need to be revisited around the MTD ITSA project, including:

• Why has HMRC ruled out providing free software to taxpayers with the simplest affairs?
• Who is responsible for the tax calculation and who pays the penalties if the calculation is wrong?
• How will errors in quarterly updates be corrected?
• How will taxpayers claim exemption from MTD filing?
• How will the system cope with taxpayers who have more than one tax agent?

This story is far from over.