Making Tax Digital

What you need to know

Making Tax Digital (MTD) is a Government initiative making fundamental changes to the way the tax system works. Transforming tax administration so that it is more effective, more efficient and easier for taxpayers to get their tax right. MTD will ultimately move taxpayers to a fully digitised system, with businesses and individuals required to register, file, pay and update their information using a secure online tax account.

Taxpayers must be fully prepared for these changes, as they could face fines or penalties if they do not comply in future.

Making Tax Digital for VAT

VAT registered businesses with a taxable turnover above the VAT threshold of £85,000 are now required to follow the MTD rules by keeping digital records and using software to submit their VAT Returns each quarter.

If you are below the VAT threshold, you can join the MTD service now on a voluntary basis.

However, VAT registered businesses with a taxable turnover below £85,000 will be required to follow MTD rules for their first return starting on or after April 2022.

Please note the “soft landing period” for digital links ended in April 2021, which means that businesses face potential penalties if they do not use HMRC-compliant software or process to report their VAT affairs.

Making Tax Digital for Income

Tax Self-employed businesses and landlords with annual business or property income above £10,000 will need to follow the rules for MTD for Income Tax from 6 April 2024. General partnerships will need to comply with these rules from April 2025.

This is the next important stage of MTD and, like the requirement for VAT, it will require self-employed businesses and landlords to report income using compliant software.

Some businesses and agents are already keeping digital records and providing updates to HMRC as part of a live pilot to test and develop the MTD service for Income Tax. If you are a self-employed business or landlord you can voluntarily use software to keep business records digitally and send Income Tax updates to HMRC instead of filing a Self Assessment tax return.

Making Tax Digital for Corporation Tax

HMRC intends to introduce its MTD initiative into the Corporation Tax system from 2026 at the earliest. At the moment, we don’t know a lot about this phase of MTD as the Government is still consulting with businesses and their agents to help design an effective MTD for Corporation Tax. The Government will provide businesses with an opportunity to take part in a pilot for MTD for Corporation Tax and will not mandate its usage before 2026.

The next steps

While the deadlines for the various stages of MTD may seem some way off, the changes required to comply with the new system are complex. Businesses and taxpayers may need to invest in new technology, such as cloud accounting software, and alter their method of recording and reporting accounts and tax information.

We have already helped a wide range of businesses with the initial stages of MTD and can assist and advise you in putting the necessary software and procedures in place.

MTD compatible software

If your accounting software is MTD compatible, it has the facility for VAT Returns to be filed with HMRC and receive information back from HMRC directly, such as confirmation that a VAT Return has been received.

HMRC has published a list of accounting software providers who currently have MTD compatible software.

However, our Cloud Accounting team can give you help and advice to find online accounting software that is suited to you and your business.