This article was co-authored by Elizabeth Tucker, Trainee Solicitor, Taunton.
The long-awaited regulatory change, also known as Making Tax Digital (MTD), has been pushed back, once again, for those completing income tax self-assessments. To understand the impact this has on financial advisors and their clients, it is important to look at the changes set to occur.
MTD is vital to the government’s Tax Administration Strategy. It requires businesses and individuals to:
- Keep digital records
- Use software that works with MTD
- Submit updates every quarter, bringing the tax system closer to real-time
Changes that have already been implemented
Since April 2022, all VAT-registered businesses have had to follow MTD rules, regardless of their taxable turnover, unless they are exempt. This includes limited companies, partnerships, sole traders, and charities. HMRC will automatically sign up all those businesses to MTD for VAT.
The delay in MTD for Income Tax Self-Assessment
MTD for Income Tax Self-Assessment (ITSA) was initially scheduled to start in 2018. This was then pushed back several times and is now set to start in 2026 or 2027, depending on thresholds (we comment further below). Just before Christmas 2022, it was announced that the new start dates would now depend upon the gross income or turnover, not profit, of the business, sole traders or landlords. It applies to the total gross income if you have more than one trade or property business.
The changes ahead
- MTD for ITSA will be introduced in two phases:
- April 2026 – mandatory for businesses, sole traders, and landlords earning above £50,000 annually.
- April 2027 - mandatory for businesses, sole traders, and landlords earning above £30,000 annually.
- General partnerships and those earning less than £30,000 annually are yet to be mandated.
- All businesses in existence immediately before April 2026 will have to follow the new legislation, regardless of whether their accounting period ends when it comes into force.
- Clients meeting the VAT and income tax criteria must sign up for both separately.
What impact does MTD have on those doing their income tax self-assessment?
MTD for ITSA will change how millions of individuals, including sole traders, landlords (and eventually partnerships), handle their taxes. However, if your income from your business or property is below the thresholds above, you can continue using the existing self-assessment system.
There are various exemptions from the requirement to use the MTD for ITSA. Including “digital exclusion”, i.e. if it is not reasonably practicable for you to use digital tools to keep business records or submit quarterly returns due to age, disability, or remoteness of location. Certain entities, such as trusts, are also excluded.
How will MTD affect financial professionals?
The delays to the mandatory start date for MTD for ITSA can be seen as a double-edged sword for financial professionals. It is undeniably frustrating that HMRC has, once again, delayed the start date for mandatory implementation. Whilst the new start dates have been published, they are not guaranteed. That said, the changes will take place at some point, regardless. It is, therefore, up to financial professionals to see this as an opportunity to consider whether or not it would be beneficial to make their clients’ business records digital now anyway and have conversations with their clients on this issue before the changes become mandatory. To prepare for this, financial professionals will need to:
- Identify the clients that will be affected by MTD for ITSA.
- Encourage clients to start digital record keeping so they are confident using software before the deadline.
- Clients will need to use MTD for ITSA-compatible software to submit their tax returns.
- Make sure that their clients confirm that they have this software in place before signing them up to MTD for ITSA.
- Make sure their clients register before the deadline.
Financial advisors may also want to seek to communicate the benefits of MTD to their clients, such as the ability to keep digital records and submit tax returns digitally, reducing human error and enabling more visibility of cash flow.
The impact of the new penalty system under MTD on financial advisors
Financial advisors should keep in mind the new sanctions under MTD. The new MTD penalty system is points-based. Therefore, penalties for not complying with MTD will depend on the MTD rules that apply to the client. Advisors who miss deadlines, resulting in their clients’ incurring points, are likely to face claims for any fines levied.
Taxpayers will accrue one point for every late submission. This translates into fines once a certain point threshold is reached. You will be subject to a £200 fine if you reach a penalty threshold. Once you reach that threshold, every subsequent failure to pay on time will incur a fine.
MTD penalty points expire after two years from the month after you received the point.
Taxpayers have a right to appeal points and penalties for MTD. However, this does not guarantee that HMRC will waive penalties. Therefore, financial advisors will need to use the reviews and appeals process and have a reasonable excuse for missing a deadline.
MTD for ITSA might be delayed until 2026, however, the need for financial professionals to digitise and streamline their own and their clients’ operations is still pressing.
Financial professionals must strive to be proactive and vigilant to help avoid penalties for failure to implement MTD changes properly. Once the changes have been implemented, advisors must be alive to their clients’ ongoing obligations under the MTD and ensure that penalties are avoided.
In the face of changes to the regulatory landscape, financial professionals are expected to come under increased scrutiny from their clients: recent research from accounting experts, Xero UK showed that 45% of SME businesses believe their financial advisor ‘is more important to them [now] than ever’. Financial advisors will need to be ever mindful of this to avoid litigation risk. They must ensure their teams are up to speed and can communicate the new rules practically. It is also helpful for financial advisors to bear in mind the next stage of MTD, Corporation Tax, which is likely to be implemented in 2026 at the earliest.