Explaining what Making Tax Digital is and how it is being expanded to include the self-employed as well as companies.

Making Tax Digital

HMRC are phasing in an initiative, Making Tax Digital (MTD), that will eventually require all businesses and the self-employed to keep digital business records and make all tax returns digitally.  

What is Making Tax Digital?

• MTD defines HMRCs ambition to modernise the UK tax system.
• The aim is to make it easier for businesses and the self-employed  to get their tax right and keep on top of their affairs efficiently and effectively.
• Businesses and the self-employed are required to keep business records digitally and send HMRC summary information using approved software.

Who is affected by Making Tax Digital?

• Since 2019, most VAT registered businesses with a taxable turnover above the VAT threshold of £85,000 have been mandated to keep digital VAT records and send returns using MTD compatible software.
• From April 2022 these MTD requirements will apply to all VAT registered businesses.
• MTD for Income Tax Self Assessment (ITSA) will apply from April 2023 for businesses, the self-employed and landlords with total business or property income above £10,000 per year.

Making Tax Digital for Income Tax Self Assessment

The self-employed, small businesses and landlords with annual business or property income above £10,000 will need to follow the rules for MTD for Income Tax from their next accounting period starting on or after 6 April 2023.

What is Making Tax Digital for Income Tax?

• This requires taxpayers to capture transactions digitally in an appropriate record keeping software.
• Requires digital engagement with HMRC via MTD compatible software.
• Requires taxpayers to create and submit quarterly updates, for business income and expenditure, to HMRC.
• In response HMRC will send an estimated tax calculation based on the information provided, designed to help taxpayers budget for tax.
• At the end of the year, any other information that would usually be submitted under Self Assessment can be added using the same software.
• For most taxpayers, this digital process will complete the Self Assessment journey.

What Making Tax Digital is not changing for Income Tax?

• The deadline for finalising tax affairs and making payments will remain 31^st January.
• There will still be a need to self assess and declare: ‘complete and correct information to the best of your knowledge’.
• Business records will still need to be kept.
• Any non-business information that must still be submitted.

 Making Tax Digital for VAT

VAT registered businesses with a taxable turnover above the VAT threshold (£85,000) are now required to follow the Making Tax Digital rules by keeping digital records and using software to submit their VAT returns.

VAT registered businesses with a taxable turnover below £85,000 will be required to follow Making Tax Digital rules for their first return starting on or after 1st April 2022.

What is Making Tax Digital for VAT?

• Businesses need to keep records digitally on MTD compatible software.
• Records need to be kept from the start of the financial year.
• Anyone using the service, whether they are mandated or want to join voluntarily, must sign up for it.
• MTD does not require additional records to be kept for VAT, but all records must be kept digitally.

What Making Tax Digital is not changing for VAT?

• Payment dates and filing dates remain the same.
• Business records will still need to be kept.

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