Making Tax Digital (otherwise known as MTD) is an initiative from the UK government to modernise the tax administration system with the aim of making it more efficient, effective and easier to work out your tax accurately.
This article will go through exactly what MTD is, who it applies to, the deadlines you need to be aware of and the various software that is compatible with Making Tax Digital.
What is Making Tax Digital (MTD)?
Making Tax Digital is a new tax system created by HMRC and the UK government that will enable all businesses and self-employed individuals to keep and complete digital tax records and returns. The goal is to eventually have a tax system that is completely paperless and allows taxpayers to see how much tax they owe in real-time.
HMRC has worked with accounting software developers on the switch to digital tax to make it as easy as possible for taxpayers to work out their tax. As a result, anyone who submits a tax return will need to connect their accounts to Making Tax Digital-ready accounting software or a bridging software that converts documents and makes them suitable for uploading to HMRC.
What are the Making Tax Digital deadlines?
As a business owner or self-employed person, you may have already heard about MTD. That’s because HMRC started introducing it gradually in April 2019, but only for VAT-registered businesses with a taxable turnover of £85,000 and above. If this applies to you, you should now be keeping digital tax records and submitting digital VAT returns.
The next date to be aware of is April 2022 – this is the VAT deadline that requires all VAT-registered businesses to comply with the HMRC Making Tax Digital rules.
From there, the next deadline will be April 2023, which will require self-employed businesses and landlords who submit a Self Assessment for business or property with an income higher than £10,000 to comply with MTD.
Finally, those who submit Corporation Tax returns should keep the year 2026 in their mind, as this is when HMRC is hoping to mandate Making Tax Digital for Corporation Tax.
Making Tax Digital for VAT
Since 2019, VAT-registered businesses that have a taxable turnover above the £85,000 threshold have been using the digital tax system, filing their tax returns to HMRC directly via compatible software.
To complete HMRC VAT online, you will need to keep the following digital tax records:
- Basic information, such as company name, address and VAT registration number
- VAT schemes you use, if applicable
- VAT on goods and services you supply and receive, so things you sell, lease, hire or transfer as well as what you buy and rent
- The time of supply and value excluding VAT
- Any adjustments to a return
- How much VAT you charge on your goods and service
- Reverse charge transactions – VAT recordings of the sale price and purchase price of goods and services
- Scheme-related information, such as Daily Gross Takings for retail or asset purchases that are eligible for you to reclaim tax on if using the Flat Rate Scheme
- Digital documents that state the multiple transactions that have been made on behalf of your business by volunteers, employees or third-party businesses
Keep in mind that you’ll need to keep these records for 6 years, so it’s best to store them somewhere safe, either on your chosen software or downloaded to your computer or hard drive.
How to keep digital records
You'll need to use MTD compatible software or other software such as spreadsheets. If you're using multiple softwares, you'll need to link them.
You can do this by:
- Using formulas in spreadsheets to link cells
- Emailing your records
- Adding records to a portable device such as a USB stick to give to your agent
- Saving files as XML or CSV
- Downloading and uploading files
Do I have to wait for the deadline?
In short, no! HMRC is encouraging those who submit VAT returns, and Income Tax to sign up voluntarily, stating that it will benefit businesses by helping them see how much tax they owe throughout the year and to measure their performance better.
If you have a VAT-registered business with a taxable turnover of less than £85,000, are a self-employed person or a landlord with business or property income that’s higher than £10,000, you can sign up to Making Tax Digital voluntarily. If you submit Corporation Tax, you may have to wait a little longer to sign up as HMRC are still preparing MTD for Corporation Tax.
How do I sign up to MTD?
To register for MTD as a VAT-registered business, you can sign up for Making Tax Digital here.
If you file a Self Assessment tax return, you can sign up for Making Tax Digital for income tax here.
How do I find Making Tax Digital software?
There are two types of Making Tax Digital software that you can use:
- MTD-compatible accounting software
- Bridging software
Accounting software allows you to track your tax, expenses and income in one place and if you choose one that links to HMRC, you’ll be able to submit your tax return directly. If you’re a business that’s in the market for accounting software that is Making Tax Digital-ready, check out our guide to accounting software platforms. Or, if you need to upload Self Assessment returns, have a look at our Self Assessment software guide.
Bridging software allows you to work on your tax through spreadsheets and other forms of documentation, then converts it to a suitable format to be uploaded to HMRC.
HMRC lists all of the accounting and bridging software that is Making Tax Digital compatible for VAT. You can use the list to either research providers yourself or look up a provider you have found to check if it’s compatible.
Making Tax Digital FAQS
Will I need to submit tax information to HMRC more regularly as a result of MTD?
No, when MTD comes into effect, you’ll not need to submit any more information to HMRC than you already are.
Will Making Tax Digital reduce tax errors?
Yes. If you’re a self-employed person who handles their tax or owns a business you’ll know how easy it is to lose a receipt or calculate something incorrectly.
MTD will make it easier to ensure you can keep track of your tax by uploading documents and seeing how much you owe in real-time, which should minimise errors and help make calculating your tax throughout the year much easier.
Will MTD mean I spend less time working on my tax?
Yes. One of the main aims of Making Tax Digital is efficiency, so you should spend much less time on your taxes.
Will the integration of accounting software cost me?
HMRC are ensuring that there are solutions available that are free or cost effective for individuals and businesses.
The only drawback is that these solutions might not match the needs of larger companies that may have more complex accounting and therefore may need to pay for software that can handle this while remaining MTD compliant.
Nevertheless, you should be able to claim the cost of accounting software against your tax.
Will I be forced to go digital?
No, those who can’t make the switch to digital will be exempt. This includes those who do not have access to technology or whose age, creed or location hinders them from using it.
Can I still use an accountant with MTD?
Yes, you can still appoint an accountant to check and submit your taxes for you.
Can I still use spreadsheets?
Yes. You can still use spreadsheets to keep digital records and work out your tax but in order to send the information you’ll need to use compatible software or ‘bridging software’, which will convert the information into a compatible format that can be uploaded to HMRC.
When is the Making Tax Digital deadline?
There are various deadlines as mentioned above, but the deadline that will require most self-employed businesses and landlords to sign up for MTD is April 2023.
What do I need to do for Making Tax Digital?
If you’re a VAT-registered business with a taxable turnover of over £85,000, you’ll need to have signed up for MTD by now.
If you’re a VAT-registered business with a taxable turnover of under £85,000, a self-employed business or landlord with a business or property income of over £10,000, you don’t need to do anything just yet, but you can sign up to Making Tax Digital voluntarily.