Making Tax Digital

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What is Making Tax Digital?

Making Tax Digital is revolutionising the way businesses report their financial information to the UK tax authority, HM Revenue & Customs (HMRC).

Digital record keeping and reporting is intended to make tax submissions easier, although it also allows HMRC to more easily check those submissions and levy penalties. It is a step towards real time reporting and more frequent tax payments by businesses.

Implementation of the project has been subject to many delays, and is likely to be further delayed due to design and project management issues.

How will Making Tax Digital affect me?

It means that you will need to consider suitable software (or a spreadsheet) and training in order to comply with the regime. As this can be time-consuming and costly, it is advisable to start the transition as soon as practicable, but bearing in mind that further (and likely) delays in the MTD project could prevent it from happening when expected.

What do I need to do?

Review how you keep your accounting records. Do you use software? Is that software compatible with MTD? We have tested many accounting packages, and can advise on the best route forward.
Are you VAT registered? If so, you needed to have registered by 1 April 2022 where your VAT turnover was below £85,000. If your turnover is above £85,000, you should already be registered.
Could you be exempt from MTD? Do you fall within one of the exemptions? Autumn Statement 2023 announced specific exemptions for foster carers and those without a NI Number.
Do you understand the digital requirements of MTD? Do you need to talk to an expert about what you need to have in place? Speak to our team.
Autumn Statement 2023 stated that the government would set up a taskforce to help small and medium-sized businesses to adopt digital technology.

VAT

MTD for VAT purposes began in 2019 for businesses with a taxable turnover above the VAT threshold (£85,000 per annum).

VAT-registered businesses with taxable turnover below the threshold needed to join MTD by 1 April 2022.

See our Insight on HMRC MTD VAT compliance checks

Income Tax

MTD for Income Tax Self Assessment is meant to start in the tax year 2026/27.

Businesses, self-employed people and landlords will be required:

to operate MTD from 6 April 2026 in relation to their trading and property income chargeable to Income Tax and Class 4 NICs if their gross income from these income sources for a tax year exceeds £50,000 (£30,000 from 6 April 2027).
to keep their records digitally (for income tax purposes only),provide digital quarterly updates and provide their income tax return information to HMRC through MTD compatible software. The requirement to submit quarterly updates to HMRC, rather than just one, is the biggest change for taxpayers.

As regards the gross income (turnover) threshold, this is ascertained by adding together income sources. So, for example, if a person has £20,000 of rental income and £34,000 of sole trader turnover, this exceeds the £50,000 threshold and that person will have to join MTD for ITSA from April 2026.

Once joined, a person cannot leave MTD unless their qualifying income falls below £30,000 for three consecutive tax years.

The programme for those with incomes between £10,000 to £30,000 has been put on hold until further notice. HMRC has not announced when it will introduce digital record keeping for general partnerships, but is likely to be delayed until well after 2026..

NOTE: Although the frequency of reporting will change, the timing of tax payments will not and the current system of payments on account and balancing payment by 31 January after the tax year is expected to remain in place for the foreseeable future.

Read our Insight on Making Tax Digital for Income Tax.

You can apply for an exemption from MTD ITSA

Businesses within MTD for VAT (from April 2022) and joining MTD for ITSA from April 2026 should ensure their software developer has a compatible product.

See HMRC's software packages compatible with Making Tax Digital for Income Tax

See what the tax profession thinks of MTD in an August 2023 survey by the Chartered Institute of Taxation.

A report by the Public Accounts Committee, published in November 2023, was critical of MTD implementation.

Corporation Tax

HMRC has not announced when it will introduce MTD for Corporation Tax. It is unlikely to take place until around 2030, if even then, and a voluntary pilot scheme would be launched prior to that.

Bishop Fleming will be able to advise you on the best and most cost-effective way to meet the challenge, once the details are known.

Contact our MTD team to discuss how we can help you transition to digital reporting ahead of the deadline.

Downloads

Check out our free downloads:

And if you need more information, our team are ready to help.

“The plan to create a fully online tax system is one of the most ambitious and far reaching administrative reforms ever attempted, and has the potential to revolutionise the relationship between businesses, taxpayers and the government”.

Making Tax Digital for Business

Since April 2019 for VAT and not before April 2026 for personal tax and probably April 2030 for corporation tax, businesses and landlords will be enrolled into keeping digital accounting records and will have to file quarterly figures with HMRC.

Some taxpayers will be exempt, such as charities, community amateur sports clubs (CASCs); and taxpayers who can’t use digital equipment due to disability, age or remoteness of location.

Free software with limited functionality will be available for taxpayers with straightforward tax affairs, though commercial accounting software with more functionality will be preferable for many. Businesses will also be able to use spreadsheets if they wish, but will have to ensure they meet the necessary requirements.

Eligibility for free software will apply where a business meets all these conditions:

they are unincorporated (e.g. a self-employed person or landlord)
they have a turnover below the VAT threshold
they have no employees
they use cash basis accounting

HMRC will not require free software to link or integrate with an agent’s product.

Digital timetable (subject to change)

April 2019 - Digitisation of VAT
April 2022 - Digitalisation of remaining VAT-registered businesses
April 2024 - Basis period reform for unincorporated businesses
April 2026 - Digitisation of personal tax
April 2030 - Digitisation of partnerships and corporation tax (to be confirmed)

The project has already been delayed a number of times, and it appears likely that further delays will occur before full implementation.

Cash basis

HMRC is proposing to allow unincorporated business with up to £150,000 of turnover to use the cash basis for their financial filings. This would allow certain adjustments for debtors, creditors etc. to be ignored.

Unincorporated landlords

Unincorporated landlords will be able to use the cash basis, so will only need to declare rental income they have actually received. Conversely, only payments actually made in the tax year would be allowable. Relief for the costs of buying furniture etc. would be give on a replacement basis.

There may be a £150,000 turnover limit for landlords (to be confirmed) who wish to use cash accounting, as their businesses do not necessarily become more complex as they grow. The cash basis would, as is already the case for individual landlords, operate by reference to the tax year (from 6 April to following 5 April).

Optional easements will apply to jointly let property, with landlords able to choose to only report their income (and not expenses) on quarterly updates and keep simpler digital records.

Voluntary tax payments

Businesses will be able to make voluntary payments on a pay-as-you-go basis via their digital accounts. Any voluntary payments made will appear in the digital account of the taxpayer or business as a credit and will be allocated against liabilities as they become due, across their range of taxes. Any unused credits will be carried forward for future use. Taxpayers will be able to choose how and when to pay.

Digital quarterly reporting

Businesses will send details of their income and expenditure to HMRC once a quarter. New businesses will have to submit their first update within four months of commencement. Businesses eligible for three line accounts will be able to submit a quarterly update with only three lines of data (income, expenses and profit).

Autumn Statement 2023 announced that quarterly updates will move to a cumulative basis, allowing errors to be corrected as part of the following update and removing the need to resubmit previous quarters.

Companies

Most companies will also have to file quarterly updates to HMRC, though exact details have yet to be published. Companies will not be enrolled into MTD until at least around 2030.

Partnerships

A nominated partner in a partnership will file updates on behalf of all partners. These updates would feed directly into each partner’s digital tax account. As a result, each partner will not need software, nor need maintain their own digital records, unless they have other business interests.

It is proposed that limited liability partnerships (LLPs) and mixed partnerships will not be exempt from quarterly reporting, whatever their level of income.

New penalties

A reformed penalty regime was introduced on 1 January 2023 by virtue of Finance Act 2021, Schedule 26.

The changes replaced the default surcharge with:

Points- based penalties for late submission;
Interest charges; and
Late payment penalties.

A late payment penalty is charged if tax is not paid within 15 days of a due date, the penalty being 2% of the amount outstanding at day 15, plus another 2% of the amount outstanding at day 30. After day 30, a further late payment penalty is charged at 4% per annum on a daily basis on the unpaid tax.

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