When does Making Tax Digital (MTD) apply? What does Making Tax Digital really mean? How will it affect you? Does MTD mean quarterly reporting? Is my business exempted from Making Tax Digital?

This is a Freeview 'At a glance' guide to Making Tax Digital: Index & timeline

At a glance

Current timetable

  • VAT:
    • From April 2019, VAT registered businesses with turnover exceeding the VAT registration threshold must retain digital records and submit their VAT returns to HMRC using 'functional compatible software'.
    • From April 2021, 'digital links' between software programs, applications or products must be in place. 
    • From April 2022, all VAT registered businesses must retain digital records and submit their VAT returns to HMRC using 'functional compatible software', unless an exemption such as digital exclusion applies. This includes those below the VAT registration threshold. 

  • Income Tax: 
    • From April 2026, self-employed businesses and landlords with business turnover above £50,000 are to report under MTD for Income Tax. 
    • From April 2027, self-employed businesses and landlords with business turnover above £30,000 are to report under MTD for Income Tax.
    • HMRC will review smaller self employed businesses to decided if they will be required to join.
    • General partnerships will join MTD but no timetable has yet been introduced.
      • Other partnerships: the date at which all other types of partnerships will be required to join will be confirmed later.
    • An MTD for Income Tax pilot is currently running but this closed to new participants in February 2023. See MTD: Income Tax Pilot Tool
  • Corporation Tax:
    • From April 2024 companies can start using an MTD for Corporation Tax (CT) pilot scheme.
    • From April 2026 companies join MTD for CT.
    • No updates have been provided on this since the postponement of MTD for Income Tax in December 2022.

What is MTD?

  • Under MTD, HMRC aim to join up their internal systems and so create one account for each taxpayer for all their different taxes within HMRC.
    • Via their 'digital account' taxpayers will be able to view all their payments and offset overpayments in one tax account against underpayments in others.
    • HMRC seek to become "one of the most digitally advanced tax administrations in the world".
  • MTD imposes new quarterly filing and potentially payment obligations for businesses and landlords.
  • Implementation: 
    • The first phase of MTD is for VAT. See Making VAT Digital
    • The second phase affects unincorporated businesses (sole traders) and landlords in respect of their Income Tax obligations. No date has yet been set for partnerships to join.
    • The third phase will affect companies in respect of their Corporation Tax obligations.
  • A New late filing and payment penalty system will eventually apply to quarterly returns and annual declarations.

Accounts and returns?

  • Although HMRC claims that the annual tax return will go, businesses will still need to prepare year-end accounts in order to reconcile their quarterly payments, claim various reliefs and make accounting adjustments.
  • They will be required to file a year-end declaration, instead of a Self Assessment (SA) return or Corporation Tax (CT) return.
  • The key difference between the year-end declaration and a tax return, other than in name, appears to be that HMRC will pre-populate some of the return figures e.g. bank interest, income from employment, pensions, etc.
  • For the self-employed, it is assumed that HMRC might attempt to pre-populate the year-end declaration with data submitted in the quarterly return figures. This is unlikely just yet, as is already the case with VAT, a business will still need to reconcile their quarterly returns to their year-end accounts and so all must reconcile to the end of year declaration.
  • All taxpayers will need to check that pre-populated data is correct.
  • HMRC is consulting on changing the way that tax assessments interact with accounting basis periods. Its systems may not cope if say five million taxpayers all pressing 'send' at once.

Impact on businsses

  • Businesses that do not use smartphones, software or computers may be obliged to do so.
    • Free software will be available.
    • MTD is likely to be expensive for many micro and small businesses. Some two million businesses are not represented by agents and they will have to either learn the new systems or appoint agents going forward.
  • Some exemptions will be available: it is already indicated that some nano businesses (turnover below £10k) will be exempt from the new MTD for Income Tax regime. They may be brought into the regime later.
  • HMRC expects that apps will 'prompt' taxpayers when they purchase goods and services so that they learn the tax deduction rules on a day-to-day basis.
  • HMRC expects taxpayers to obtain their guidance online and not via the telephone. It will be developing online resources to reduce human interaction by telephone.
  • The government's published TIIN estimates that there will be an average transitional cost of £330 and an annual cost of £35 per business within scope.

What's new?

Simplifying Making Tax Digital (MTD) for Income Tax Self Assessment

At the Autumn Statement 2023, the government plans to make design changes to Making Tax Digital for Income Tax Self Assessment by:

  • Simplifying the requirements for all taxpayers in providing quarterly updates and for taxpayers with more complex affairs, such as landlords with jointly-owned property.
    • Rather than requiring a total for the three-month period covered by each update, each update will be a cumulative total of income and expenses accumulated for the tax year to date. This should avoid the need for corrections to previous updates when errors have been identified.
    • Joint property owners will be able to decide whether they want to provide quarterly updates or not and will have less onerous digital record-keeping requirements.
  • Removing the requirement to provide an End of Period Statement.
  • Exempting some taxpayers from MTD altogether, including those without a National Insurance number and foster carers.
  • Enabling taxpayers using MTD to be represented by more than one tax agent.
  • Draft regulations will be published for technical consultation later in 2023 with a large-scale public beta testing programme commencing in 2025.
  • The policy paper confirms that MTD for ITSA will not be extended to businesses with income below £30,000 for the foreseeable future though this will remain under review.

HMRC have opened a new consultation ‘Tertiary legislation for Making Tax Digital for Income Tax’ inviting views on draft legislation which sets out the requirements for Making Tax Digital (MTD) for Income Tax.

  • It confirms that landlords and sole traders who must now join MTD from April 2026 but are under the VAT threshold, will only have to submit three line accounts to HMRC.
  • Those who are over the VAT threshold (£85,000) will have to submit income and expenses by category with property income split between UK and overseas, Furnished Holiday Lets and other types of letting, and FHL's split between UK and EEA holiday let businesses. 

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