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 Making Tax Digital 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 Making Tax Digital 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 Making Tax Digital. The software uses your business’ information to show your current tax data in real time and can help you to spot any possible errors. 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 Making Tax 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 Making Tax Digital for VAT, read this guide.
Business tax account
As part of Making Tax Digital, 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 series of delays. Due to the impact on businesses of the coronavirus pandemic, the government announced its first delay in September 2021. However, to allow more time to prepare a further delay was announced by the Government on 19th December 2022 along with changes to the thresholds.
Sole traders and landlords
The necessary MTD quarterly reporting and software will be required for the following:
- For those with income of more than £50,000, Making Tax Digital reporting will be required from 6th April 2026.
- Where income is more than £30,000, Making Tax Digital reporting will be required from 6th April 2027.
For HMRC guidance please click here.
The Government remains committed to extending Making Tax Digital for Income Tax Self Assessment to partnerships, but this will not take place from April 2025 for general partnerships, as originally scheduled. MTD ITSA for partnerships will be introduced, but from a date yet to be confirmed.
Digitally excluded individuals can apply to be excluded from MTD for ITSA if the following conditions apply:
- it would be impractical to keep digital records and use the MTD software due to location, disability, age or another reason, or
- your beliefs in your religious society or order are against the use of electronic submissions or retention of electronic records.
An application will duly need to be made to HMRC and in this you will need to explain your personal circumstances. HMRC will then consider whether you meet the exemption and what your next steps are.
HMRC guidance on the application and the process can be found here.
The Government has yet to confirm how the thresholds of £30,000 and £50,000 are to be applied. However, under the previous guidance the following points are to be noted:
- The 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 £10,000 of rental income and £23,000 of sales as a self-employed trader, you will exceed the threshold and be in scope
It is our current understanding that any income which does not need to be shown on your tax return will not count towards the 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.
In this instance the following deadlines would apply:
|Period covered||Filing deadline|
|1st quarterly update||1st April to 30th June||5th August|
|2nd quarterly update||1st July to 30th September||5th November|
|3rd quarterly update||1st October to 31st December||5th February|
|4th quarterly update||1st January to 31st March||5th May|
HMRC guidance on the period dates can be found here.
Where an individual carries on more than one trade, separate quarterly updates will need to be submitted to HMRC. For example, individuals carrying on a trade and receiving rental income.
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
There are two steps to closing a tax 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.
Separate EOPS will be required for each business/trade being run by an individual.
2. Final declaration
Once the EOPS is submitted, the individual must then submit a final declaration or crystallisation. This collates 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.
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.
Step by step guidance
For individuals who need to complete the necessary MTD submissions for their income tax reporting, HMRC have provided a step by step guide which can be found here.
Making Tax Digital for corporation tax
The Government has said Making Tax Digital 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.
Date published 19 May 2022 | Last updated 18 Apr 2023This 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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