Corporate report

Making Tax Digital Small Business Review: outcome

Published 22 November 2023

1. Introduction 

The government’s vision is for a trusted, modern tax system – one that fits with how customers live their lives and run their businesses, keeps the tax gap low, and helps to create the right conditions for UK economic growth.  

An important step towards this is the introduction of Making Tax Digital for Income Tax Self Assessment (MTD for ITSA), which follows the successful introduction of MTD for VAT in April 2019 and its extension in 2022. 

MTD for ITSA will require self-employed individuals and landlords to use compatible software to keep digital records and send light-touch quarterly updates to HMRC, so that tax records are kept up to date and reflect their current situation. 

Digitalising the service will bring customer benefits by: 

• helping them to get their tax affairs right first time
• reducing the time spent at the end of the year due to keeping ongoing digital records 
• supporting wider productivity for small businesses and limiting time spent managing paperwork
• enabling HMRC to better tailor services to customers

In December 2022, the government announced that self-employed individuals and landlords will have more time to prepare for MTD for ITSA.  

Those with annual income over £50,000 will be mandated to join MTD from April 2026, followed by those with income over £30,000 from April 2027.  The government remains committed to the future introduction of MTD for ITSA to partnerships as part of its tax administration strategy. 

At the same time, the government announced a review into the best way to approach the needs of smaller businesses, particularly those under the £30,000 income threshold. The review considered whether and how those with income below £30,000 should be brought into MTD, including how MTD for ITSA could be shaped for these smaller businesses. 

The announcement of December 2022 reflected the government’s understanding that self-employed individuals and landlords are facing a challenging economic environment and gave customers, agents and HMRC more time to prepare.  

The development of a modern, digitalised tax administration system will support small businesses to grow. It will reduce time spent on administration for small businesses, enable them to better integrate tax with wider business planning and give them greater confidence that they are getting their tax right.  

Equally, the government recognises that the transition to MTD ITSA represents a significant change to customers and HMRC for how self-employment and property income is reported. Taking the time needed to get this right, through closer joint-working between HMRC and external partners, will provide an improved overall experience for customers using MTD and their agents.  

2. Background to the review 

This document sets out the outcome of HMRC’s review into how MTD for ITSA addresses the needs of small businesses.  

The review has looked at how MTD could apply to the smallest businesses with income under £30,000, considering whether MTD remains the right strategic approach for some or all of this population.  

It has also considered options to change the design of MTD for all mandated and non-mandated users, with the aim of minimising potential burdens and streamlining processes.  

The review’s approach centred around engagement with stakeholders. HMRC drew on the professional expertise and insight of accountancy, business and landlord representative bodies, and software developers. For direct evidence from those who may have to use MTD for ITSA, HMRC commissioned research to understand the perspectives of landlords and sole traders with trading or property income below £30,000.  

As well as holding over forty meetings with these groups, HMRC has hosted collaborative sessions with stakeholders to drive resolution of outstanding service design and policy issues. A summary of stakeholders consulted is at Annex A. 

By bringing users into the heart of the process, HMRC has been able to rapidly review key questions relating to the design of MTD. Those include whether the mandation threshold for MTD for ITSA should be lowered below £30,000, how MTD for ITSA will accommodate customers who use more than one agent, how best to design the customer journey for landlords with jointly-owned property, and necessary easements for customers without a National Insurance Number (NINO).  

Addressing and resolving these design challenges will help to make MTD simpler and easier-to-use for customers, while preserving MTD’s overall aims to reduce the tax gap and support small businesses to grow. 

3. Review outcomes 

The government remains committed to delivering MTD for ITSA and believes this is central to building a trusted, modern tax administration system and supporting small business productivity. The digitalisation of records and tax administration will help businesses to keep on top of their tax affairs, saving them time and reducing errors while, in turn, reducing the tax gap from error and carelessness.  

HMRC’s commissioned research and evaluation of MTD for VAT demonstrates that it is already achieving these aims. The review has identified a number of ways to simplify and improve the design of MTD for ITSA, and resolve outstanding design issues. In doing so, the government aims to set out a clear basis for scaling up MTD’s public beta testing before bringing the new requirements into effect from April 2026.  

The MTD mandation threshold  

As described above, in December 2022, the government set out a revised plan for introducing MTD for ITSA. Sole traders and landlords with income over £50,000 will be mandated to join MTD from April 2026, followed by those with income over £30,000 from April 2027. These requirements apply to around 1.75 million customers. 

Following this engagement, the government will keep under review the decision on further mandation of businesses and landlords with income below £30,000.  

Keeping this decision under review will allow HMRC to closely monitor users’ experience of MTD through public beta testing, ensuring this addresses the needs of all customers and that there is sufficient software provision for this section of the market. Businesses and landlords with income below £30,000 will still be able to register voluntarily for MTD, as happens currently with VAT registration. 

Simplifying MTD for all users 

The review has also identified several practical changes to the design of the MTD for ITSA service. These will simplify and improve the experience for MTD for ITSA users and respond directly to stakeholder feedback.  

Improving the design of quarterly updates 

Under MTD for ITSA, customers must send summary updates of their business and property income and expenses to HMRC every 3 months.  

The updates are simple summaries of income and expenses, generated from the software used to keep digital records.  There is no requirement to make accounting adjustments or include allowances or reliefs available against business and property income. The customer’s MTD-compatible software will manage much of the process.

Customers will create and store digital records using a smartphone or a computer. The updates themselves will require little more than a ‘check and send’ if using MTD compatible software.

The government believes that quarterly updates are central to the design of MTD. They help to ensure that customer records are kept closer to real-time, driving down common errors that contribute to the tax gap. They allow customers to call-up estimates of their emerging liability on-demand throughout the tax year and they support customers to get their tax right by enabling HMRC to deliver more targeted digital prompts and nudges to customers throughout the tax year.  

Through the review, stakeholders highlighted a need to amend the design of quarterly updates to make it easier to amend or correct errors throughout the tax year. The government agrees that this will simplify and improve the design of quarterly updates, and will introduce this change. 

Rather than a total for the 3-month period covered within the update, each update will be a cumulative total of income and expenses accumulated during the tax year to-date. This will remove the burden upon customers of having to resubmit a previous update where corrections to previously submitted figures are required. This change will be set out in regulations.  

The government will also continue to support the use of 3-line accounts within MTD, for customers with annual turnover from self-employment or property income that is below the VAT registration threshold. For most customers, this will avoid the need to categorise expenses when completing quarterly updates, saving them time by allowing them to submit these as a single figure. 

Simplifying processes by removing End of Period statements 

MTD for ITSA’s original design required customers to make such accounting and tax adjustments as law requires and claim any allowances or reliefs available against their business or property income following the submission of the year’s quarterly updates. Customers would then be required to make an End of Period statement (EOPS) declaration to confirm that information for the accounting period is correct and complete, finalising the year’s income for each income source.  

Once the EOPS declaration is complete for each business income source, customers would have needed to submit a final declaration presenting a finalised position across all income sources. This is equivalent to the current Income Tax Return.  

The government has listened to feedback that the EOPS declaration is potentially confusing for users and duplicates information provided through the final declaration. The government agrees that MTD-compatible software will minimise the need for the EOPS as a formal process within MTD and agrees to remove this requirement.  

Removing the EOPS declaration will simplify customers’ experience of the service, saving time and reducing the number of formal requirements needed to comply with MTD obligations. This change will be set out in regulations. 

Introducing easements for landlords with jointly-owned property 

Landlords who let properties jointly are taxed on their share of the income, though there are special rules for people who are married or in a civil partnership. That income share is added to income they receive from properties they own solely to form part of their UK property business or overseas property business. 

The government recognises that some landlords with jointly-owned property could have encountered challenges with the existing design of MTD because they would have needed to compute their share of income and expenses each quarter, requiring them to transfer transactional records to one another. This represented an additional burden for these customers.  

To reduce the administrative burden for landlords with jointly-owned property, landlords will be able to:  

• choose not to submit quarterly updates of their expenses which relate to jointly owned properties, which will reduce their in-year administration. These records will still need to be submitted before customers finalise their tax position for the year
• keep less detailed digital records in relation to their jointly owned properties, therefore simplifying the transfer of records between joint owners  

These changes will be set out in regulations and update notices.

Exempting specific groups from MTD requirements 

The government recognises that there are certain groups for whom there are limited benefits in being mandated for MTD or who face particular barriers in meeting MTD’s requirements.  

One customer group identified as deriving limited gains from MTD is foster carers. The government will therefore remove the need to operate MTD for ITSA in relation to receipts for qualifying care income.

In addition, the government recognises that customers who are unable to obtain a National Insurance Number face barriers to accessing HMRC’s digital services, and so will be unable to comply with MTD requirements. The government will introduce an exemption from MTD requirements for customers who are unable to obtain a National Insurance Number. In cases where a customer’s inability to acquire a National Insurance Number is temporary, the government’s intention is that they would subsequently be mandated into MTD. These changes will be set out in regulations.  

Enabling customers to be represented by more than one tax agent within MTD for ITSA 

The government recognises that many customers who will join the MTD for ITSA service will use an agent to manage some or all of their tax responsibilities. 

For some, the increased reporting requirements for MTD for ITSA will mean that HMRC’s online service capability that allows only one agent to act on a customer’s behalf for a specific tax will be insufficient for their needs.

The government anticipates that many customers will want the option to authorise more than one agent within MTD.  This would enable (for instance) quarterly updates to be done by one agent with another agent completing the end-of-year processes and final declaration. 

The government is committed to developing a solution allowing multiple agents to act on a customer’s behalf in support of MTD mandation. 

4. Further work to support introduction of MTD 

Further to the above changes to MTD’s design, HMRC is continuing a range of work to ensure its introduction supports the needs of all users. This will continue in the period before the first mandation in April 2026, and includes the following: 

Supporting users with non-aligned accounting periods 

The government’s reforms to the basis period rules create a single, consistent, fairer tax-year basis and will be introduced from 2024/25: two years ahead of the first mandation into MTD. Overall, these reforms are an important simplification in advance of MTD, making the transition to MTD smoother for most businesses. Most users will have accounting periods that are aligned with the tax year (equivalent to 31 March to 5 April) by the time MTD is mandated in 2026.

However, HMRC recognises that there will be a small minority of users who will continue to have ‘non-aligned’ accounting periods. Compared to aligned users, this will create some complexity and reduce the accuracy of MTD’s in-year estimates. HMRC is working with software developers to explore the development of software functionality to improve the customer experience within MTD for those with accounting periods that do not align with the tax year. 

Reviewing minimum standards for software developers 

The government sees a wide market for a range of software products, which will ensure users get the most value and best possible customer experience from MTD. HMRC is reviewing its minimum functional standards for MTD software products to ensure these standards support innovation in the software market and incentivise the development of the best possible software products.   

Developing communications to support beta testing from 2024 and mandation from 2026 

Through work on the review and collaborative sessions addressing design challenges, HMRC has strengthened and improved joint working and engagement with accountancy, business and software industry stakeholders. HMRC will continue this approach through the delivery of MTD, with a focus on delivering communications activity that supports customer readiness in the run up to the first mandation of MTD for ITSA in 2026. HMRC’s communications programme will include work to build software developer, agent and taxpayer readiness; promote inclusion in the large-scale public beta testing programme beginning in 2025; and encourage voluntary early adoption of MTD. 

5. Next steps 

Following this announcement, HMRC will publish a technical consultation on draft regulations reflecting the outcome of the review and implementing the changes to the mandation timetable announced by the government in December 2022. Regulations will be laid in February 2024, providing a further step towards introducing MTD for ITSA in April 2026. 

The government is committed to working with stakeholders to get the design of MTD for ITSA right. These outcomes demonstrate tangible improvements and provide important clarity on MTD’s final design. By simplifying and improving the experience of users within MTD, these changes will support MTD’s aim to reduce the tax gap, helping small businesses to get their tax right, and supporting their growth and productivity.   

The government is grateful to those who have contributed to the review and ongoing wider engagement. HMRC will continue to work with external partners, including through a thorough testing programme, to ensure the design of MTD addresses the needs of users. 

Annex A 

Stakeholder groups consulted during the review
Administrative Burdens Advisory Board (ABAB)
Agent Support Group (ASG)
Association of Accounting Technicians
Association of Certified Chartered Accountants
Association of Convenience Stores
Association of Tax Technicians
BASDA
British Chambers of Commerce
Business Landlords Association
Certified Public Accountants Association
Chartered Accountants in Ireland
Chartered Institute of Taxation
Chartered Institute of Taxation
Federation of Small Businesses (FSB)
Independent Professionals and Self Employed (IPSE)
Intuit
Institute of Accountants and Bookkeepers
Institute of Certified Bookkeepers
Institute of Chartered Accountants in England and Wales
Institute of Chartered Accountants of Scotland
Institute of Financial Accountants
Large Professional Services Firms (LPSF)
Low Income Tax Reform Group (LITRG)
National Farmers Union (NFU)
National Hair and Beauty Federation (NHBF)
National Residential Landlords Association (NRLA)
Representative Bodies Steering Group (RBSG)
Sage
Scottish Association of Landlords (SAL)
Scottish Childminding Association (SCA)
Tax Aid
TaxCalc
Tourism Alliance
Trade Advisory Group
Untied
Wolters Kluwer
Xero