What is Making Tax Digital? A Guide
What does MTD stand for?
Let’s get the acronym out of the way first. MTD stands for Making Tax Digital.
What is Making Tax Digital?
MTD is a government initiative, led by HMRC. As the name suggests, Making Tax Digital is all about moving to a system of digital tax records and returns. When MTD is fully implemented, businesses and the self-employed will have to use approved software for keeping their financial records and submitting their tax returns. In other words, the tax system will become paperless.
Why is MTD being introduced?
HMRC says that MTD is being introduced “to make it easier for individuals and businesses to get their tax right and keep on top of their affairs”.
The more cynical amongst us would see that this is likely the precursor for a system that collects more tax from us earlier (quarterly) rather than 9 months after the end of each tax year.
However, it’s highly likely that HMRC will claim that MTD as a more transparent system that will help to reduce tax reporting errors and fraud. Certainly, HMRC is keen to gain access to more of our financial data – if implemented, proposals from the Office of Tax Simplification could soon give the taxman access to our bank, pensions and other financial data.
Which taxes does MTD apply to?
Making Tax Digital currently applies to VAT. In the near future it will also cover Income Tax and Corporation Tax. Scroll down to learn more about MTD and each of these taxes.
Is MTD compulsory?
Largely, yes. There are – or will be – certain exemptions based on turnover or other factors. Read on to learn more about exemptions for MTD for VAT, Income Tax and Corporation Tax. In addition, you can apply for an exemption if it’s not reasonable or practical for you to use a computer. This may be because of your age, a disability, the remoteness of your location or your religious beliefs. You can currently apply for an exemption from MTD for VAT by visiting this page.
When does Making Tax Digital start?
Making Tax Digital for VAT has already begun. MTD for Income Tax Self Assessment (MTD ITSA) and MTD for Corporation Tax are both in the pipeline. These are the start dates for each type of Making Tax Digital.
- MTD for VAT
- VAT-registered businesses with an annual taxable turnover of £85,000 or more needed to comply with this scheme by April 2021.
- All VAT-registered businesses must take part in MTD from April 2022.
- MTD ITSA
- You can join a pilot scheme now if you are a sole trader with income from one business, a landlord who rents out property, or both.
- Self-employed people and landlords with income of £10,000 will be required to be part of the scheme by April 2023. Partnerships comprising only individual partners will also have to join.
- MTD for Corporation Tax
- A pilot scheme is expected to start in April 2024
- MTD for Corporation Tax should become compulsory in April 2026.
MTD for VAT explained
You must also submit your VAT returns using this software. As of April 2021, you can now no longer submit your VAT returns in XML format via HMRC’s website.
Your VAT return dates remain the same. If you submit your VAT returns quarterly, they are due on the same date as before – seven days after the month following the end of the VAT quarter.
MTD for Income Tax (MTD ITSA)
Making Tax Digital for Income Tax Self Assessment goes live for most self-employed people, landlords and partners from April 2023.
As with MTD for VAT, you will need to use approved software to submit your Self Assessment Tax Returns. However, instead of making an annual tax return, you will need to make quarterly submissions. These will due on the fifth day of August, November, February and May. This means most people will make their first submission on 5th August 2023.
As well as submitting quarterly returns, you’ll need to submit an End of Period Statement by 31st January each year. This lets you make adjustments, such as to capital allowances and losses. You can also declare other income and capital gains via a Finalisation Statement, which is due on the same date.
Although you will have to make quarterly Self Assessment Returns via your software, you will still pay your Income Tax on the same dates – the main bill by 31st January and your payment on account by 31st July.
MTD for Corporation Tax
Making Tax Digital for Corporation Tax will be the last plank of MTD to be put in place. There will be a pilot scheme in 2024 and it will become mandatory in April 2026.
HMRC launched a consultation on MTD for Corporation Tax, which closed in March 2021. The key changes it proposed were for businesses to:
- Maintain digital records of income and expenditure
- Provide HMRC with quarterly summary updates using MTD compatible software
- Making an annual Corporation Tax return using compatible software.
We will update this section as more information is released about the scheme.
How do I sign up for MTD?
If you are a VAT registered business with a taxable turnover, you should already have signed up for MTD for VAT. If you are VAT registered but have a lower turnover, you need to sign up by April 2022.
You will need to sign up for MTD for Self Assessment Income Tax by April 2023. However, some people are able to sign up for a pilot scheme now. You can do this if you are:
- A UK resident
- Registered for Self Assessment and your payments are up to date
- A sole trader with income from one business, or a landlord who rents out UK property (or both)
- Sign up for the MTD ITSA pilot
Currently, you cannot sign up for MTD for Corporation Tax. We will update this section when the Making Tax Digital for Corporation Tax pilot goes live (currently expected in 2024).
Do I need special software for MTD?
Generally, ‘yes’. The simplest method is to choose an MTD-approved software package. Currently there are many packages available that are fully compliant with MTD for VAT. We recommend Xero or Freeagent, depending on your business’s size and needs.
Because MTD for Income Tax is only starting to be phased in, there are fewer compliant software packages available. The Gov.uk website maintains a list of available software here, which is expected to grow rapidly. Xero has already launched an ITSA solution for accountants and bookkeepers, so a compliant personal version won’t be too far behind.
In due course, software will be released that’s compliant with MTD for Corporation Tax.
There are methods of making software such as spreadsheets compliant with MTD. These rely on creating ‘digital links’ that create an unbroken digital chain as data is moved from one application to another. For more information on this, follow the link to our blog post below.
How can THP help me with Making Tax Digital?
At THP, we’ve chalked up a huge amount of experience helping clients to comply with MTD for VAT. This has included helping them to migrate to MTD-compliant software packages as well as ensuring their VAT returns are submitted accurately and on time.
We are now working with self-employed people and landlords who need to prepare for MTD for Income Tax Self Assessment. If you would like advice or help with planning for this, please get in touch today using the form below.
More about Making Tax Digital
Want to learn more about Making Tax Digital? If so, please browse our blog updates about MTD.