making tax digital
Making Tax Digital (MTD) is a key initiative by HM Revenue & Customs (HMRC) aimed at simplifying tax management for individuals and businesses. This is part of HMRC's broader digital strategy to ensure that tax affairs are more accurate and efficiently managed.
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Why MTD?
The primary motivation behind MTD is to address the tax gap —the difference between the tax that is paid and the tax that should be paid. HMRC attributes a significant portion of this gap to taxpayer errors, which often stem from poor recordkeeping practices.
To combat this, MTD mandates that businesses, organisations, and individuals maintain digital records using either bookkeeping/accounting software or, at the very least, spreadsheets. By digitising record-keeping, HMRC anticipates a substantial reduction in errors, thereby closing the tax gap and ensuring more accurate tax compliance.
Latest updates on MTD
On 19 December 2022, the government announced that selfemployed individuals and landlords will have more time to prepare for MTD for Income Tax Self-Assessment (ITSA). Starting from April 2026, self-employed individuals and landlords with an income of more than £50,000 will be required to keep digital records and provide quarterly updates on their income and expenditure to HMRC through MTDcompatible software. Those with an income of between £30,000 and £50,000 will need to comply from April 2027. Voluntary compliance is encouraged beforehand to reduce errors and save time.
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A review into the needs of smaller businesses, particularly those under the £30,000 income threshold, is also underway. This review will explore how MTD for ITSA can be tailored to meet the needs of smaller businesses and the best ways for them to fulfill their Income Tax obligations.
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MTD for VAT
MTD for VAT-registered businesses was introduced on 1 April 2019. If your business turnover exceeds the VAT threshold (currently £85,000), you are required to follow MTD rules and file digital VAT returns. From April 2022, all existing voluntarily registered businesses and all newly VAT-registered businesses must submit their VAT returns under the MTD program.
MTD for Income Tax
The next stage of HMRC’s digital transformation is MTD for Income Tax and Self-Assessment (ITSA), set to come into force on 6 April 2024. Sole traders and landlords with total business or property income (not profit) above £10,000 per year will be required to follow the MTD rules and file digital income tax self-assessment returns.
What Does MTD Mean for Sole traders?
If you are a sole trader or landlord with an annual income exceeding £10,000, MTD will change how you keep financial records and file your income tax return. Combined income from multiple businesses must be considered. For example, if you earn £8,000 from rent and £4,000 from a part-time selfemployed business, you exceed the £10,000 threshold and must comply with MTD.
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From April 2024, you will need to use MTD-compatible software to keep digital records of all your financial transactions and make regular tax submissions to HMRC, including:
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Four quarterly updates detailing income and expenses.
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An End of Period Statement (EOPS).
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A Final Declaration at the end of the tax year.
MTD for Sole Traders and Landlords
MTD for ITSA requires more administration, so meticulous record-keeping will be essential. Cloud accounting software simplifies this task, and Finova Accountancy can assist you in making the transition.
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If you are a VAT-registered sole trader or landlord, you should already be submitting your VAT returns with MTD-compliant software, making the transition to MTD for income tax easier.
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MTD for Limited Companies
VAT-registered businesses are already required to comply with MTD for VAT. Although MTD for Corporation Tax is not planned to take effect until at least 2026, participating in the upcoming pilot from 2024 is advisable.
If you are a newly formed limited company and need advice on Making Tax Digital, contact Finova Accountancy for expert guidance.