Making Tax Digital

Pranav Mistry

"I'm good with digital technology, but I start to miss the physical world. I miss riding my bike, talking to friends."

Making Tax Digital - A new UK tax regime

Making Tax Digital (MTD) was announced in the April 2015 Budget and is intended to digitise tax collection in the UK. It was originally intended to be 'the end of the tax return' and was due to start by April 2020. In 2024, nine years after the initial announcement, HMRC are still struggling to put a coherent proposal together.

MTD has three distinct areas of operation -

➣ MTD for VAT

➣ MTD for income tax

➣ MTD for companies

MTD for VAT was extended to all VAT registered businesses from April 2022 as this was a simple re-design of filing the same nine figures on the non-digital VAT returns.

MTD for income tax (MTDIT) is slated for introduction in April 2026 but is still some way off beta development and is far from being a replacement for self assessment.

The original plan for MTDIT caused an outcry from accountants and small business and HMRCs prposals have been heavily criticised by Parliamentary committees. Nevertheless, HMRC is pushing ahead with what many accountants consider to be a doomed project.

The concept of MTDIT is for all tax data to be held digitally by taxpayers and used to report to HMRC each quarter. However, HMRC cannot (or will not) say what the advantage might be other than to ‘close the tax gap’ - a wholly notional concept.

MTD for VAT - How does it work?

Businesses must keep ‘digital records’ of all transactions, using software that is capable of linking directly to the HMRC systems. Spreadsheets are an acceptable digital record.

The VAT report must be made using software directly linked to HMRC - figures cannot be recorded manually in the VAT return as previously.

Only the totals for each of the boxes on the VAT return need to be reported. No additional data is sent to HMRC.

MTD for VAT - What are digital records?

Three quarters of all VAT registered businesses do not use accounting software. These businesses :

• keep track of their finances using a spreadsheet, or

• rely on an accountant or bookkeeper to prepare their books, or

• maintain manual records

A spreadsheet meets the requirement for digital record keeping.

If a business uses proprietary bookkeeping software then this will contain a facility to file the VAT figures with HMRC. For spreadsheets, “bridging” software is used to file.

If you are considering accounting software, have a look at our Business Software page.

MTD for Income Tax - An Outline

MTD for income tax (MTDIT) is still being developed so the commentary below may change -

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

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

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

MTDIT requires the use of software which will :

➣ create and store digital records of each of your business transactions

➣ send the totals of your business income and expenses to HMRC every three months

➣ confirm end of period statements

As well as quarterly tax returns, each year there will be a requirement to file a final declaration and any income that falls outside MTDIT will also need to be disclosed on a further tax return - a minimum of 6 filings replacing the current single annual tax return.

If you have more than one business there is a requirement to file MTDIT returns for each. So if you are self employed but have rental income that means 11 tax returns to be filed each year.

If you have more than one 'business' source there will be a requirement to keep separate records for each business.

If you receive property income from multiple properties, all properties that are in the UK are treated as one ‘UK property business’ and properties outside of the UK are treated as one ‘overseas property business’.

There are more details of the current proposals at the link below :

https://www.gov.uk/guidance/using-making-tax-digital-for-income-tax

MTD for Companies

MTD for corporation tax is due to commence in April 2026 although there have been no announcements by HMRC on the details of the scheme since 2022.

At the moment there is no proposed minimum turnover threshold for MTD for Corporation Tax, and it’s not yet clear what kind of businesses will be included in that phase of Making Tax Digital.

HMRC hopes to roll out a voluntary pilot for incorporated businesses in 2024, with a view to implementing MTD for corporation tax as a legal requirement by 2026 at the earliest.

Companies may eventually need to keep digital records detailing their income and spending through MTD compatible software, digital entries that will help create reports which will be sent to HMRC every three months.

These quarterly reports would also form the basis of the annual corporation tax declarations.

Like MTDIT, the scheme is in very early stages of development and the rules and deadlines may change.

Need Help?

Do you need help with any of the issues discussed on this page?

If you need assistance with UK tax filing we can complete and file a return for you with all tax calculations taken care of.

We can agree a fixed fee in advance.