Making Tax Digital

Overview of Making Tax Digital

Making Tax Digital (MTD) is the UK governments initiative to modernise the UK tax system. Making Tax Digital aims to make it easier and more efficient for businesses and individuals to record and declare tax to HMRC. Under the new rules, HMRC legally requires eligible businesses to record transactions digitally and submit returns to HMRC using MTD compatible software.

Making Tax Digital not only affects individuals, sole traders, landlords, partnerships, contractors but also small business and large business as well as other organisations and how they maintain their accounting and tax records as well their communication with the HMRC. These changes encourage businesses to step away from paper records and maintain digital records instead. MTD requirements are that the majority of business owners and organisations to maintain and submit digital tax records using MTD compliant software.

What does Making Tax Digital involve?

Making Tax Digital requires individuals and companies to:

• keep digital records
• use software that works with Making Tax Digital
• submit updates every quarter, bringing the tax system closer to real-time

Under the Making Tax Digital initiative, businesses can no longer use manual record keeping and all records need to be maintained in functional compatible software which can connect to HMRC’s interface.

A phased rollout of MTD is already in progress, however, HMRC continues to shift and change implementation dates for the various phases of the MTD plan.

Making tax digital timeline

April 2022

Making Tax Digital for VAT applies to all VAT registered businesses, whether you are above the VAT threshold or voluntarily registered for VAT. You are required to submit MTD for VAT digital returns.

The new tax legislation doesnt change your normal VAT return deadlines or the information you need to send. You can check when your next return is due on your online VAT account.

April 2026

Making Tax Digital for Income Tax will apply to self-employed individuals and landlords with income over £50,000.

From April 2024 companies can start using an MTD for Corporation Tax (CT) pilot scheme.

From April 2026 companies join MTD for Corporation Tax.

April 2027

In 2022, the government announced the delay in Making Tax Digital for Income Tax Self Assessment (MTD for ITSA). MTD for ITSA will apply to self-employed individuals and landlords with income over £30,000.

Date TBC

HMRC will review smaller self-employed business to decide if they will be required to join.

General & other partnerships will join MTD, but no timetable has been set.

Keeping MTD digital records

If you already use software to maintain your financial records, ask your software provider whether their software is MTD compatible. If not, you’ll need to look at alternative software options.

Nomisma, the online accounting software provided by dns accountants is fully MTD compatible software. You can find details of all MTD compatible software here.

Making Tax Digital compatible software is required to:

• maintain business records as required for MTD
• prepare and send quarterly updates and end-of-period statements
• finalise your business income and submit your declaration after the end of the tax year
• communicate with HMRC digitally through HMRC’s platform.

You will no longer be able to just maintain financial records in paper form.

Making tax digital software

Why you need Making Tax Digital software

All VAT-registered businesses must keep digital records & submit VAT returns using MTD compatible software.

Choosing HMRC-recognised MTD software

It’s important to choose software that’s 100% HMRC-recognised, MTD-compliant and easy to use.

Benefits of Making Tax Digital software

MTD compatible software can provide additional benefits. For example, have up to date financial information at your fingertips 24/7, make invoicing and your bookkeeping easier and provide you with great reporting.

MTD bridging software

MTD bridging software is designed for those who want to keep using spreadsheets instead of full MTD software. However, our advice would be to switch to a full online software solution such as Nomisma accounting software that dns accountants provide.

Making Tax Digital for VAT

If you have a VAT registered business, you are now required to keep digital records and file your MTD VAT returns using compatible software.

HMRC will sign up all remaining businesses to Making Tax Digital for VAT automatically unless they are exempt or have applied for exemption.

ALSO READ : VAT Registration

Making Tax Digital for Income Tax

You need to follow the requirements for Making Tax Digital for Income Tax (MTD for ITSA) if you are self-employed or a landlord from:

• 6 April 2026 if you have an annual business or property income of more than £50,000
• April 2027 if you have an annual business or property income of more than £30,000

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 Making Tax Digital for Income Tax. If you are a self-employed business or landlord, check if you can voluntarily sign up now through your software provider.

Benefits of making tax digital

• Time saving
• Better cash flow forecasting
• Avoiding unexpected tax bills
• Access to information

MTD late submission penalty system

The new penalty systems applied to Making Tax Digital for VAT submissions as of 1 January 2023.

Once Making Tax Digital for Income Tax begins the new penalty systems will apply to that too.

The new penalties were also intended to include Self Assessment taxpayers but following the delay to Making Tax Digital for Income Tax, announced in December 2022, there’s currently no start date for those with income under £30,000.

The new late submission system is based on a points system. After a certain number of points are reached by a business or individual, a financial penalty of £200 is automatically applied.

In general terms, one point is applied each time a submission deadline is missed. HMRC will notify you at that time.

As you might expect, you can appeal both points and penalties – see below.

The points threshold for the penalty varies depending on how frequently the individual or business is required to make submissions to HMRC.

• Monthly: Five points are required for the penalty to be applied.
• Quarterly: Four points are required. Notably, this includes both VAT quarterly submissions and quarterly updates for MTD for Income Tax.
• Annual: Two points are required.

A key point to note is that separate points tallies are recorded for VAT and Income Tax, and separate penalties could be subsequently applied.

Summary

Making Tax Digital is a UK government initiative that must be complied with. Whether you are a sole trader, partnership, self-employed individual, small business or larger business, as a business owner, you need to understand MTD. Making tax digital involves keeping digital records and submitting digital tax returns to HMRC.

About the author

Sumit Agarwal
Sumit Agarwal (ACMA ACA India), the Managing partner of dns accountants is a highly respected accountant with expertise in helping owner-managed businesses.