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What is Making Tax Digital?

Originally announced by the then Chancellor of the Exchequer, George Osborne, in his 2015 Budget, Making Tax Digital (MTD) is the government’s programme to update the UK’s tax system for the modern age.

The ambition is for HM Revenue and Customs (HMRC) “to become one of the most digitally advanced tax administrations in the world” by requiring businesses and individuals to keep digital records and use MTD-compatible software to submit regular updates about their tax affairs to the government.

The main aims of Making Tax Digital are to make the tax system:

  • more effective
  • more efficient
  • easier for taxpayers to get their tax right

A 2017 government-commissioned report said errors account for £9.4bn of tax lost annually, so by replacing paper-based bookkeeping with digital tax accounts, taxpayers can more easily check the information HMRC holds about them is 100% correct.

HMRC also says that the digital reporting requirement means it can look at tax details almost immediately, reducing human error from data input.

In addition, the government says MTD means taxpayers can better understand how much tax they owe and contact HMRC more easily using webchat and other online methods.

The first phase of MTD was introduced in 2019. It covered VAT for VAT-registered businesses with an annual turnover above the VAT threshold.

What is Making Tax Digital-compatible software?

Under the Making Tax Digital rules, you can continue to use traditional spreadsheets and connect to HMRC systems using ‘bridging software’ but using fully compatible software for the entire process makes managing your tax and accounting records much easier.

Online accounting software, such as QuickBooks and Xero, allow you to keep the digital records that are required by MTD. The software uses your business’ information to show your current tax data in real time. This can help you to spot any possible errors. When necessary, you and your accountant can use the software to submit updates directly to HMRC.

Making Tax Digital: What has happened so far?

Making Tax Digital for VAT

The first phase of MTD began on 1st April 2019 with Making Tax Digital for VAT. It required all VAT-registered businesses with a turnover above the VAT threshold (currently £85,000) to keep digital VAT records and submit quarterly VAT returns to HMRC using MTD-compliant online accounting software.   

On 1st April 2022, the rules were extended to VAT-registered businesses with a taxable turnover below the VAT threshold of £85,000.

As of December 2021, the government said almost 1.6m taxpayers had joined MTD for VAT with more than 11 million returns submitted.

For more details on the requirements for businesses under MTD for VAT, read this guide.

Business tax account

As part of MTD, individuals, sole traders, partnerships and limited companies have access to an online business tax account. It can be used to check their tax position for over 40 taxes including Self-Assessment, VAT, PAYE and corporation tax.

Making Tax Digital: What will happen next?

Making Tax Digital for Income Tax Self-Assessment

Making Tax Digital for Income Tax Self-Assessment (ITSA), also known as Making Tax Digital for Income Tax, was originally scheduled to begin April 2018 but has suffered from a serious of delays. Due to the impact on businesses of the coronavirus pandemic, the government announced in September 2021 that it has been delayed as follows:

  • For sole traders and landlords with business or property income above £10,000, MTD for ITSA will start from April 2024.
  • For general partnerships with an income above £10,000, MTD for ITSA will start in April 2025.

Exemptions will apply for the digitally excluded and where an individual has qualifying income below £10,000 per year, they will not be required to operate MTD for ITSA.

To determine if the £10,000 threshold for MTD for ITSA applies, there are some important points to note:

  • The £10,000 threshold applies to gross income/turnover, not profit
  • It applies to the total gross income where the individual has more than one trade or property business. For example, if you have £8,000 of rental income and £8,000 of sales as a self-employed trader, you will exceed the threshold and be in scope

Our current understanding is that any income which does not need to be shown on your tax return will not count towards the £10,000 threshold. For example, if you received rent a room receipt below the tax threshold, or trading income below the £1,000 trading allowance, this income will not count towards the threshold if these are not shown on your tax return.

Affected taxpayers will be required to keep digital accounting records and use MTD-compatible software to submit quarterly updates to HMRC of their income and expenditure.

The following deadlines will apply:

  Period covered Filing deadline
1st quarterly update  6th April to 5th July 5th August
2nd quarterly update  6th July to 5th October 5th November
3rd quarterly update  6th October to 5th January 5th February
4th quarterly update  6th January to 5th April 5th May

If preferred, it is anticipated that businesses can make a calendar quarter election which means they can draw up quarterly updates to the end of the previous month instead of being drawn from the 6th day of the month.

Our current understanding is that each trade or property business carried on by an individual will require separate quarterly updates.

End of year

At the end of your accounting period, you will need to finalise your business income, making any accounting adjustments and confirming to HMRC that the updates you sent are correct. After the end of the tax year, a final declaration will need to be filed. This declaration replaces the Self-Assessment tax return.

End of period statements

We understand that there are two steps to closing a year:

1. End of Period Statement (EOPS)

You will need to file a EOPS which is similar to the current personal tax return and involves putting through adjustments and finalising the tax position of the business.

2. Final declaration

Once the EOPS is submitted, the individual must then submit a final declaration or crystallisation. This brings together all business and personal information (such as investment income) so the final liability can be determined.

Regardless of your business year end, your EOPS will cover the whole tax year following basis period reforms, which remain proposals at this stage.

Tax payments

Although reporting income tax liabilities is set to change, the timing of tax payments will remain the same. The current system of payments on account and balancing payment by 31st January / 31st July is expected to remain.

In a policy paper, HMRC said the introduction of Making Tax Digital for ITSA will impact on approximately 4.2m taxpayers including landlords, sole traders, partnerships and civil society organisations.

A date for when Making Tax Digital for Income Tax will apply to limited liability partnerships and partnerships with corporate partners has yet to be announced.

Making Tax Digital for corporation tax

The government has said MTD for corporation tax (CT) will not be introduced before 2026. The change will affect incorporated businesses that pay corporation tax.

Full details have yet to be confirmed but as with the other rules, it is expected that affected companies will need to keep digital corporation tax records and use MTD-compatible software to submit quarterly updates and annual corporation tax returns.

Need help with Making Tax Digital?

TaxAssist Accountants can provide support on complying with Making Tax Digital and choosing the most appropriate Making Tax Digital-compliant reporting software for your business.

To book a free initial consultation on your Making Tax Digital obligations, contact our friendly and experienced team on 01628 617100. Alternatively, you can fill in the online enquiry form.

Date published 19 May 2022 | Last updated 20 May 2022

This article is intended to inform rather than advise and is based on legislation and practice at the time. Taxpayer’s circumstances do vary and if you feel that the information provided is beneficial it is important that you contact us before implementation. If you take, or do not take action as a result of reading this article, before receiving our written endorsement, we will accept no responsibility for any financial loss incurred.

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