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While HM Revenue & Customs (HMRC), through the Making Tax Digital (MTD) initiative for Income Tax, aim to move toward a completely digitalized tax system, the inclusion of non-residents presents greater complications. In addition to the added difficulties in terms of scope and administrative feasibility, there are also some differences in how this applies to them compared to resident individuals.
The inclusion of non-residents into MTD is not precluded; what determines the inclusion of non-residents is whether they receive qualifying income sourced from the UK. Whether it be property rental income or profits earned from self-employment in the United Kingdom. If the total gross property income and self-employment income exceeded £50,000, then regardless of domicile, they would be included in the MTD. Under MTD for Income Tax, taxpayers must submit quarterly updates to HMRC (generally by 7 August, 7 November, 7 February and 7 May), followed by a final declaration by 31 January after the end of the tax year. HMRC is attempting to link a taxpayer's obligation to report tax returns to the source of their income, rather than their location of residency. These quarterly updates must be submitted using compatible digital software, as HMRC requires records to be maintained and filed electronically under the MTD regime.
This approach creates several practical and theoretical problems. Most non-resident taxpayers have tax filing responsibilities in other countries, applying a UK based digital reporting requirement to a person living abroad will create significant administrative burdens since the availability of digital reporting tools and compatible software may vary greatly depending upon which country they reside in.
To help alleviate some of these issues, HMRC has created a list of exemptions as well as a list of deferrals which will remove the requirement for some individuals to comply with MTD for the time being. A notable temporary deferral includes those who complete the residence (SA109) page, whereby they can defer from participating in MTD until April 2027. This indicates an understanding by HMRC that the issue regarding non-residency and digital reporting still exists and needs to be addressed regarding the MTD system. Additionally, non-residents who do not possess a National Insurance Number are also exempt from MTD.
Additionally, relying solely on income generated from sources located within the UK to determine if an individual is obligated to participate in MTD may seem reasonable but limiting. It provides assurance that UK-based income will be accurately reported, but it does not take into consideration all aspects of a non-resident's overall compliance burden. An example of this could be when a non-resident already complies with other digital reporting requirements under their home country's regulations which results in duplicate efforts for compliance purposes and increased costs.
In summary, although including non-residents in MTD is consistent with the principal objective of taxing UK source income, the operationalization of MTD for non-residents is currently incomplete and does not present some new challenges for non-residents with UK sourced income.
Reference/Citation
Making Tax Digital: exemption cases, when and how to apply | ATT – (https://www.att.org.uk/technical/making-tax-digital-exemption-cases-when-and-how-apply)
Non-residents and Making Tax Digital (MTD) | Competex - https://www.competex.co.uk/non-residents-and-making-tax-digital-mtd/
Find out if you can get an exemption from Making Tax Digital for Income Tax | HMRC- https://www.gov.uk/guidance/find-out-if-you-can-get-an-exemption-from-making-tax-digital-for-income-tax
