Making Tax Digital (MTD) is a government initiative 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.
The MTD initiative will make the tax system more effective, more efficient and easier for customers to comply with. HMRC aims to drastically reduce taxpayer error and regain lost revenue, saving billions each year.
MTD requires most businesses, self-employed professionals and landlords to update and maintain digital records using third-party software, such as Xero.
Making Tax Digital – 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 was extended to all VAT-registered businesses with turnover below the VAT threshold of £85,000.
Making Tax Digital for Income Tax – important dates
MTD for Income Tax will have three key components – digital records, quarterly updates and a year-end declaration. The year-end declaration will be similar to the current self-assessment tax return, which will include year-end tax adjustments for the sole trade/rental income sources and include disclosure of other sources of income and gains.
From April 2026 onwards, the government has announced that sole traders or landlords with income form self-employment and/or property will need to use MTD for Income Tax where their combined income exceeds the following thresholds:
- April 2026 onwards – Sole Trade/ Rental Turnover exceeding £50,000
- April 2027 onwards – Sole Trade/ Rental Turnover exceeding £30,000
- April 2028 onwards – Sole Trade/ Rental Turnover exceeding £20,000
Currently, the payment dates for tax will not be affected and these will remain on 31st January and 31st July for the foreseeable future.
Under the MTD scheme, the way taxes are reported will change, with more frequent reporting and a continuous compliance cycle being introduced. However, 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.
Current exemptions
HMRC recognises that not all organisations are fit to use the digital tools required for Making Tax Digital. Therefore, it will review potential exemptions on a case-by-case basis.
Making Tax Digital for Income Tax will not apply to any partnership profits or trust income.
Digitising financial systems
Digitising financial systems has become a necessity for businesses in recent years, ourselves included, which is why we spent significant time assessing the options within the marketplace when it came to implementing the right accounting software solution. As Global Xero Partners, we recommend Xero to all our clients. Xero is a market-leading, cloud-based accounting platform and our software of choice for many reasons, including its compatibility with a range of different applications that allow clients to get the most out of cloud accounting. To find out more about Xero, contact a member of our business services team or explore our webpage.
Our specialist tax team and business services team are on-hand to ensure you are compliant and benefit from the new digitised tax system. For more information on Making Tax Digital and how we can support you through the switch to digital, get in touch with us today.
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