HMRC launches Making Tax Digital income tax pilot

HMRC has signalled it is extending its flagship Making Tax Digital initiative to include income tax reporting, by offering self employed individuals and their agents the opportunity to join a pilot for using software to keep business record digitally and send income tax updates to HMRC, instead of filing a self assessment tax return

The service is available for those who are a sole trader with income from one business and whose current accounting period ends after 5 April 2018. Anyone with income from any other sources may still have to report it using a self assessment tax return.

Those who sign up can choose from what HMRC describes as ‘a number of options’ for software.  On the approved list currently are two names: IRIS and Rhino.

Individuals are required to use the software to keep a record of income and expenses. If they want to carry on using their current recording method to keep business records, they are required to make sure that the software used to send updates to HMRC can link to this to automatically transfer the data.

An income and expenses summary must be sent to HMRC every three months. Users can view an estimate of the tax they might owe at the end of their accounting year, based on the information provided so far in their business tax account, as well as through their software.

Individuals will also need to send a final report to confirm their income and expenses at the end of their accounting year. If they need to claim allowances and reliefs, they can do this within that final report.

Users can also choose to send an update to HMRC more often, for example, if they want to see a more up-to-date estimate of the tax owing, and can pay their bill on a ‘pay as you go’ basis if that makes it easier to manage their budget. They can also ask their accountant to send updates on their behalf.

To sign up for the pilot, users need to use the government gateway user ID and password they got when they signed up to the self assessment online service.

HMRC was forced to reduce the planned scope of Making Tax Digital last July, when it was announced that it would be mandated only for VAT-registered businesses initially.

Brian Palmer, tax policy adviser, Association of Accounting Technicians (AAT), described the move to pilot the income tax version as a ‘soft launch’, given its limitations to just the self-employed, although it is anticipated that unincorporated landlords will be able follow next month.

‘Given last July’s Ministerial announcement postponing mandation for all except the VAT registered with turnover above £85,000, it is hardly surprising there are currently so few income tax Making Tax Digital-compliant products available. 

‘As a direct consequence, software providers switched their resource to ensuring their products will be capable of filing Making Tax Digital-compliant VAT returns. Many are now confident that they have products ready to coincide with the start of the VAT-Making Tax Digital  private testing phase widely anticipated to be in April this year,’ he said.

Palmer pointed out that the fact there are only two income tax update filing solutions available, and mandation places the emphasis squarely on VAT, meant there was unlikely to be a ‘headlong rush’ by the self-employed to on-board for income tax purposes.

‘However, I do anticipate that if the VAT MTD-pilot is a success, and the subsequent mandation phase goes well, there will be a slow but steady stream of self-employed businesses joining the income tax pilot.

‘Indeed, as confidence grows in the pilot, accountants and tax advisers may decide self-employed start-ups should be on-boarded straight into MTD, to avoid the need to transition from the current regime when mandation comes back on the table,’ he said.

Guidance: Use software to send Income Tax updates is here.

Software for sending Income Tax updates is here.

Agents: use software to send Income Tax updates is here.

Report by Pat Sweet

Pat Sweet |Reporter, Accountancy Daily [2010-2021]

Pat Sweet was the former online reporter at Accountancy Daily and contributor to the monthly Accountancy magazine, pub...

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