Making Tax Digital (MTD) is an initiative from the UK government that aims to digitise the tax system and make it easier for everyone to keep track of their tax affairs.
The main goal of MTD is to reduce the burden of tax compliance and to make the tax system more efficient and effective.
MTD is being implemented in phases, with the first phase focusing on VAT-registered businesses with a taxable turnover above the VAT threshold (currently £85,000).
These businesses will be required to keep digital records of their VAT transactions and to use MTD-compatible software to submit their VAT returns.
This requirement came into effect on April 1, 2019.
The government has stated that the eventual goal of MTD is to extend the digital record-keeping and submission requirements to other taxes, such as income tax and corporation tax.
As of September 2021, most of these changes are slated to be implemented from April 2024 and beyon.
The introduction of MTD has raised some concerns among businesses and individuals.
Some have questioned whether they will be able to comply with the new requirements, particularly if they are not familiar with digital record-keeping or if they do not have access to suitable software.
Others have raised concerns about the cost of implementing MTD, and the potential impact on small businesses in particular.
At Majors Accounts, we are an agile, technology-first accountancy firm who have been helping businesses to adjust to the new tax system. We are here to demystify the new tax rules, and help people to feel confident about adjusting to an MTD world.
In this article we look at:
Prepare for MTD with Majors Accounts
What is MTD?
Making Tax Digital (MTD) is a UK government initiative that aims to make it easier for individuals and businesses to keep track of their tax affairs. In making the tax system digital, the intention of MTD is to reduce errors and improve the accuracy of tax returns.
To comply with MTD, Individuals and businesses will be required to keep records of their tax-related transactions electronically, and use digital/online tools to submit their tax returns to HMRC.
Is MTD Compulsory?
Yes, Making Tax Digital (MTD) will become mandatory for most businesses, individuals, and organisations.
“Businesses need to have signed up to Making Tax Digital for their first VAT return starting on or after 1 April 2022. They may not be required to make their first submission via Making Tax Digital until Summer 2022.”
There will be fines and penalties for those who do not comply.
When is MTD Compulsory?
The government is currently rolling out MTD in stages, with the first phase focusing on VAT returns for businesses with taxable turnover above the VAT threshold of £85,000 coming into force in April 2019.
In April 2022, this was extended to all VAT registered businesses.
This means that these businesses will be required to keep records of their tax-related transactions electronically and to use digital tools to submit their VAT returns to HMRC starting from April 1, 2019.
Here is a rough timeline of how MTD has affected VAT, Income Tax and Corporation Tax since April 2019:
- April 2019: Most VAT-registered businesses with turnover exceeding the VAT registration threshold of £85,000 must retain digital records and submit VAT returns using “functional compatible software”
- April 2021: “Digital links” for data transfer or exchange between software programs, applications, or products must be in place. This is detailed in Paragraph 3.2.1 of this government notice
- April 2022: All VAT-registered businesses (including those below the threshold) must retain digital records and submit VAT returns using software unless an exemption such as digital exclusion applies.
- April 2024: Self-employed businesses and landlords with business turnover above £10,000 must report under MTD for Income Tax (delayed by one year). See this government notice for more.
- April 2025: General partnerships join MTD
- Date TBC: Other partnerships are required to join MTD for Income Tax
The government has been running a pilot programe for MTD for Income Tax which has reportedly been affected by low uptake.
- April 2024: Companies can start using MTD for Corporation Tax (CT) pilot program
Does MTD apply to sole traders and self-employed?
Sole traders and the self-employed are individuals who run their own businesses and are responsible for their own tax affairs.
As of April 2022, if you are a VAT-registered business you are expected to keep digital records and be compliant with MTD’s technical standards.
Further on in this article, we will look at the tools and software you can use for this.
What Will Change When MTD Launches?
The biggest change to business taxes after MTD’s introduction is the requirement to keep records of tax-related transactions electronically.
This means quite a drastic change in individuals and businesses’ relationship with HMRC, and the level of insight you have into your own tax affairs. Moving to a new-fangled technology might be daunting, and the jargon might be unfamiliar, but technology gives everyone more power to be more in control with taxes.
Another big change is the requirement for businesses to use smartphones, software, or computers to submit digital tax records.
Free software will be available, but the program is likely to come at an inconvenient cost for many small businesses.
Some exemptions will be available, such as for businesses with very low turnover.
HMRC expects taxpayers to use apps and online resources to learn about tax deductions and to avoid interacting with HMRC by phone.
Tools for MTD
One of the biggest changes, and by extension a source of apprehension for businesses, are getting used to new technologies for your tax returns.
Tools that fall under the “functional compatible software” and will make your transition easier are:
- Spreadsheet software, such as Microsoft Excel or Google Sheets, which can be used to record and manage your tax-related transactions. Google Sheets is free to use, Excel requires a paid license.
- Accounting software, such as Xero, QuickBooks, or Sage, which can be used to record and manage your tax-related transactions and to prepare and submit your tax returns to HMRC.
- MTD-compliant bridging software, which can be used to transfer data from your existing accounting software to HMRC
- HMRC’s own MTD-compliant software, which can be used to record and submit your tax-related information directly to HMRC.
You will need to choose the tools that best suit your business and your needs.
It is important to note that the software you use must be MTD-compliant, meaning that it is capable of working with HMRC’s systems and able to submit your tax-related information in the required format.
How to Register for MTD
To register for Making Tax Digital (MTD), you will need to have a Government Gateway account and be registered for VAT.
If you already have a Government Gateway account, you can use this to log in and register for MTD.
If you do not have a Government Gateway account, you can create one by visiting the Government Gateway website and following the instructions.
Once you have logged in to your Government Gateway account, you can register for MTD by selecting the option to “Sign up for Making Tax Digital for VAT” and providing the necessary information.
If you are not registered for VAT, you will need to do this before you can register for MTD. You can register for VAT by visiting the HM Revenue and Customs (HMRC) website and following the instructions.
Once you are registered for VAT, you can then register for MTD as described above.
Note that the introduction of MTD is being phased in gradually, so not all businesses and individuals will be required to use it immediately. For example, only businesses with taxable turnover above the VAT threshold will be required to use MTD for their VAT returns starting from April 1, 2019. Other businesses and individuals may be required to use MTD in the future, but the details of these plans have not yet been finalized.
Preparing for MTD
In April 2023, the UK government’s Making Tax Digital (MTD) initiative will be extended to include income tax.
This means that businesses and landlords will be required to submit their income tax information digitally on a quarterly basis, in addition to the traditional self-assessment season.
To prepare for this change, businesses should educate themselves and their clients about the benefits of MTD and make sure their systems are adapted to manage four income tax periods each year.
Our MTD Accountant
Eriona Bajrakurtaj, ACCA ACPA MSc LLM
Eriona is an expert in helping businesses understand and manage their tax affairs aligned with the recent MTD government initiative. Eriona’s experience is limitless and is a current member of the quickbooks’ Accountant Council.
Frequently Asked Questions about MTD
Is Making Tax Digital Compulsory?
Yes, the government Making Tax Digital scheme requires all VAT registered businesses to keep digital records and encourages owners to file tax returns using compatible software.
Do I need to Register with HMRC for MTD?
All VAT registered businesses are now required to sign up with HMRC in accordance with the MTD government scheme.
MTD enables business owners to submit their VAT returns with MTD-compliant software.
Unless your business is exempt or has applied for an exemption to the scheme.
Can I be exempt from Making Tax Digital?
If you cannot use computers, software, or the internet to comply with the rules for Making Tax Digital for VAT, you can still apply under special circumstances.
Factors include age, disability, location, religious grounds, or any other reason why it’s not reasonable or practical.
HMRC will evaluate each application individually and make a decision accordingly.
What Happens if I Don’t Register for MTD?
If you don’t comply with the requirements from HMRC, you will face penalties for late payments.
To avoid this, join the MTD scheme or contact HMRC on how to do so.
Please note, you must have functional compatible software in place before you sign up.
What does MTD mean for Self Employed?
Starting from 6 April 2026, sole traders and landlords with income over £50,000 must use compatible software for Making Tax Digital for Income Tax Self Assessment (ITSA).
During this period, an End of Period Statement will need to be submitted to HMRC, along with a Final Declaration including all taxable income by 31 January each year.
For VAT-registered sole traders, MTD rules have been mandatory since April 2019 for businesses earning over £85,000, and from April 2022, all VAT registered businesses must use MTD software for submitting VAT returns.
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