Making Tax Digital (MTD) is a government initiative, first announced in 2015, intended to modernise the tax system – making it more effective and efficient for taxpayers to submit critical tax information and keep on top of their tax affairs. The scheme also marks the end of self-assessment tax returns.
MTD requires most businesses, self-employed professionals and landlords to update and maintain digital records using third-party software.
Making Tax Digital for businesses – what has happened so far
MTD was partially introduced on 1st April 2019, applicable only to VAT businesses registered with a taxable turnover above £85,000. All affected businesses were required, by law, to store their VAT records digitally and file their returns using digitally compatible software.
From April 2021, the VAT soft landing period ended, meaning businesses must now have digital links and record-keeping systems in place.
From April 2022, MTD will be extended to all VAT-registered businesses with turnover below the VAT threshold of £85,000.
Making Tax Digital for individuals – upcoming changes to the way taxes are reported
From April 2023, MTD will be extended to taxpayers who file income tax self-assessment tax returns for business or property income over £10,000 annually.
HMRC estimates that approximately 2535k sole trade businesses, 900,000 landlords, and 450,000 partnerships will be affected by the change in reporting requirements.
Under the MTD extension, the way taxes are reported will change. More frequent reporting, with a continuous compliance cycle will be introduced. The tax process, and the amount of tax collected, will not change.
Those who are affected will need to keep digital records of all business income and expenses – keeping only paper records will no longer be accepted.
Businesses will switch to submitting quarterly returns to HMRC. After these returns have been submitted, HMRC will return a year-to-date calculation of tax owed based on the information provided in the summary. Affected businesses will also need to submit a fifth and final year-end summary report for each tax year.
HMRC recognises that not all organisations are fit to use the digital tools required for MTD. Therefore, it will review potential exemptions on a case-by-case basis.
Although the process of Making Tax Digital is already in action, further changes to the system must be anticipated.
Our specialist tax team are on hand to support you through the switch to digital. We’ll ensure you are compliant and benefiting from the digitised tax system.