In July 2020, the government published a 10-year strategy to build a trusted, modern tax administration system, including how taxpayers are identified and registered by HMRC.
The government is seeking views on how and when taxpayers with new sources of self-employment or property income should start to interact with the tax system and whether current processes can be updated to provide a better experience for individuals and businesses.
Reform in this area aims to create a more efficient tax system that protects the taxpayer. If taxpayers interact with the tax system early, they get the best opportunity to understand their tax obligations and prepare for paying tax.
The scope of this call for evidence is limited to self-employment income, property income, and partnership or foreign income from trading and property.
How does it work?
An individual who starts a new trade or property business, must give notice to HMRC of their liability for income tax by 5 October after the tax year in which their trade or property letting business commenced. This is the rule if the individual is not already within self-assessment.
Where the individual is already within the self-assessment regime, they can inform HMRC of their new trade or business on the self-assessment tax return that covers the period in which the business commenced.
The delay between starting to trade and informing HMRC of that new trade can be considerable, and this will be important under the Making Tax Digital ITSA regime.
*Taxpayer journeys for the newly self-employed and landlords. Image by HMRC.
Why change the deadline?
In its call for evidence paper, HMRC argues that an earlier registration deadline for ITSA will bring benefits for taxpayers as well as for the tax authority.
HMRC believes that the taxpayer will benefit, as interacting with the tax system at an earlier stage will allow the individual to form good record-keeping habits, and give them more time to plan their first tax payment.
Benefits of Registering for ITSA
Reasons individuals may register for ITSA include accessing additional products and services, like:
- Preserving their National Insurance record to support applications for maternity allowance
- Gaining access to Tax-Free Childcare
- Joining the Construction Industry Scheme
- Accessing third-party software or financial credit to help their business in its early days and enable growth
- Accessing Universal Credit, with obligations to report self-employed income to the Department for Work and Pensions.
The benefits for HMRC? They will have a more accurate and up to date picture of the self-employed community.
Making Tax Digital
The call for evidence paper doesn’t specifically mention that an earlier ITSA registration date may, in future, allow HMRC to change the Making Tax Digital regulations to require taxpayers to enter the Making Tax Digital ITSA regime from an earlier date.
From 1 April 2022 VAT registered traders will have to enter Making Tax Digital from the day the VAT registration takes effect, ie the first day that the business has a liability for VAT.
The mandation into Making Tax Digital ITSA is referred to as the “digital start date” for the business, to distinguish it from its actual start date. A business that commences on or after 6 April 2023 will have a digital start date of 6 April which immediately follows the filing deadline for the tax return that reports gross self-employed and/or property income in excess of £10,000.
Under the current MTD ITSA regulations the taxpayer will pay and report income tax under the self assessment system for at least two years at the start of their trade, before being required to switching into digital record keeping and MTD reporting once their total self-employed turnover (from trade and property) exceeds £10,000.