Last month, HMRC began forcibly signing up the remainder of businesses that were obliged to join Making Tax Digital (MTD) from April this year and have thusfar failed to do so. At the same time, they’ve started mounting a campaign to encourage the next cohort of businesses (sole traders and landlords with gross income over £30,000) to prepare early for the 2016/27 tax year and sign up as soon as possible.
But why are the next cohort, due to be signed up for MTD next year, called mini-micro businesses, I hear you ask. Well, as a micro business is defined as a very small enterprise that employs fewer than 10 people and has an annual turnover less than £2 million, then logically a one-man or woman business with a turnover under £50k needs a name that more accurately reflects its size, hence mini-micro.
A bit more detail
With six months to go until MTD is extended to sole traders and landlords with qualifying income over £30,000, HMRC is ramping up its campaign to ensure as many of the near 1¼ million taxpayers affected, to sign up for the new quarterly reporting regime. The main problem facing HMRC is than around 350,000 of this cohort do not use an accountant or have any outside financial advice whatsoever.
For such tiny businesses, the new MTD system will be a major administrative headache. These taxpayers, with very modest earnings have thusfar only interacted with the tax office once a year when they file their annual self-assessment tax return. To make matters worse, most of this group do not use any form of software, except perhaps an excel spreadsheet, to prepare their end of year figures, with some not even owning a computer.
The vast majority of these individuals complete their own tax returns and the compulsory enrolment into MTD will force many of them to pay for an accountant from their very modest profits due to the onerous nature of MTD. This means that their tax professional will have to prepare 5 tax returns a year (including the self-assessment tax return) costing the mini-micro businesses, as an absolute minimum, upwards of £500 p.a.
What exactly will HMRC want?
Under MTD, these sole traders and landlords will have to file quarterly digital records of income and expenses from self-employment and/or property four times a year using a HMRC approved compatible software package. HMRC are already struggling to get the first wave of £50k p.a. taxpayers to sign up and have now resorted to auto-enrolment for anyone who missed the first two filing deadlines.
HMRC have belatedly acknowledged growing concerns on the scale of the new tax reporting requirements and have issued a brief press statement claiming: ‘The quarterly updates are not additional tax returns, but short summaries.’ But as one wry accountant said to me recently, if you believe that you probably also believe that the moon is made of cheese.
It is important to be aware that turnover includes gross income from self-employment and property before any tax allowances or expenses are deducted. Also, it’s worth noting that these thresholds will not be increased in line with inflation and will drag in many more taxpayers over the following few years.
Other changes
The MTD threshold for mini-micro businesses will drop again in April 2028 to £20,000, in effect creating the equivalent of PAYE for sole traders and landlords. Craig Ogilvie, HMRC’s director of making tax digital, recently commented: ‘Signing up now means you can prepare and familiarise yourself with the process before joining the MTD tax regime becomes mandatory.’
Ogilvie went on to say: “HMRC is working with a range of partners, including professional bodies, British Retail Consortium, OneDance Yoga Alliance Professionals, and many others and as we prepare future MTD cohorts, we’ll continue building on these partnerships and the collaborative approach that has worked so well. We will continue to write directly to unrepresented customers to give them specific support,’
It has not been confirmed whether HMRC will offer a targeted penalty waiver for the £30,000 cohort, as the current soft-landing regime ends on 5th April 2027. As a result, there will be no leniency shown to the lower earners being pulled into MTD penalty regime for 2027-28 MTD signups.
When asked for clarification, HMRC’s Ogilvie confirmed: ‘There is no update at this time. Any further updates on penalty points for customers in Making Tax Digital for Income Tax will be made in line with established tax policy-making principles.‘ He finished his announcement by suggesting supporting customers (= taxpayers) who are not represented by an accountant remains a key priority for the team and I, as we’ve demonstrated over the past few years.’
Accountant’s view
Having heard the podcast of the recent Q&A session with Craig Ogilvie, I was left thinking that it’s been a long time since I’ve heard so much ‘bovine excrement’ from the mouth of a tax office official. I was particularly infuriated by his claim that HMRC had gone out of their way to be supportive to taxpayers who do not have an accountant. My experience and that of most other accountants, is overwhelmingly the exact opposite.
And finally, who the hell are OneDance Yoga Alliance Professionals and why is HMRC treating them as an advising partner, whilst excluding trusted bodies such as the Resolution Foundation, Citizens Advice Bureau and especially the FSB (Federation of Small Businesses), all of which are much bigger and have a track record of professionalism.
