This page explains the pro-rata scenarios in FOI-2025/162436, which consider how income in the 2024/25 tax year is treated when a business continues into the 2026/27 MTD ITSA year. The response to Question 2G raises an unresolved issue.
Please apply those rules to the following scenarios and state whether the taxpayer is included in, or excluded from, MTD Tranche 1; and if included which classes of business must be used (self-employment, property or both). If no recorded decision trees exist, please confirm that HMRC holds none.
In scenarios F, G and H, the pro-rata rules may tip the taxpayer over the £50k annual threshold. If this is the case then please address whether the taxpayer could appeal inclusion under the fairness rule implied by “If a person’s qualifying income for a tax year is in respect of a period of other than 12 months, the qualifying income must be adjusted proportionately on a time basis, or, if that method would work unreasonably or unjustly, on a just and reasonable basis.” Please describe the process to be used and the expected timetable of the HMRC response.
SA103 business with £40k income; business ceases on 30/09/2024.
HMRC will not pro rata income that has ceased. The SA103 business ceased on 30/09/2024, and its qualifying income (from self-employment and property) is below £50,000. Assuming no other sources of qualifying income that together with the SA103 income exceed the £50,000 threshold there will be XXXX requirement to use MTD for Income Tax going for the 2026/27 tax year.
XXXX The author considers the word NO is missing from there will be NO requirement……..]
The primary rule is the rule that excludes discontinued businesses so the pro-rata rule is no longer relevant.
Scenario F was similar to E so is not reported
SA103 business with £40k income; business continues PLUS SA105 [summer lettings] business with £8k income; business ceases on 30/09/2024.
We have provided two possible answers due to insufficient detail in the scenario to provide a definitive response. How the rules are applied will depend on whether the SA103 business’s income of £40,000 reflects the entire 2024/25 tax year or whether it reflects a continuing seasonal trade.
Answer 1 - SA103 (non-seasonal) business continues, SA105 business ceases:
Qualifying income of £48,000 during 2024/25 is less than the £50,000 threshold for April 2026 mandation. The SA103 business is therefore not subject to mandation for 2026/27.
Answer 2 - SA103 (seasonal) business continues, SA105 business ceases:
If the £40,000 qualifying income from the continuing SA103 business reflects seasonal trade, HMRC will pro rate that income to establish whether the qualifying income for 2024/25 is more than the £50,000 threshold for April 2026. The SA103 business could be mandated for tax year 2026/27.
If the taxpayer was trading for the whole of 2024/25 then a key question is how would HMRC detect that the business is seasonal and might therefore apply the pro-rata rule?
If 2024/25 was the first year of trading for the SA103 business then the pro-rata rules may apply. This might produce unexpected outcomes for a small winter trading business that operates in December but at no other times of the year.
The HMRC response did not answer the question about how the taxpayer might appeal a pro-rate decision. See further analysis.
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