What is Making Tax Digital

HMRC's Digital Tax Transformation: Revolutionising Reporting and Payments in the UK

Introduction

In today’s rapidly evolving digital landscape, technology is transforming various aspects of our lives, and taxation is no exception. In the UK, the HM Revenue & Customs (HMRC) has launched the ambitious initiative known as Making Tax Digital (MTD). This initiative aims to revolutionise the way businesses and individuals report and pay their taxes by transitioning to a fully digitalised tax system. In this blog post, we will delve into what MTD entails, its current status, and how it affects businesses and taxpayers.

What is Making Tax Digital (MTD)?

Making Tax Digital is a forward-thinking initiative by HMRC to replace traditional tax reporting and payment methods with fully digital processes. The core objective of MTD is to streamline tax administration, enhance accuracy, and reduce errors by mandating the use of digital record-keeping and MTD-compatible software for tax submissions.

The MTD Timeline

MTD has been rolled out in a phased manner to ensure a smooth transition for businesses and individuals. As of now, MTD only applies to Value Added Tax (VAT), with future phases set to encompass other taxes.

April 2022: Making Tax Digital for VAT applies to all VAT-registered businesses.
April 2026: Making Tax Digital for Income Tax applies to self-employed individuals and landlords with an annual income over £50,000.
April 2027: Making Tax Digital for Income Tax applies to self-employed individuals and landlords with an annual income over £30,000.

Making Tax Digital for VAT

The first phase of MTD, implemented in April 2019, targeted VAT-registered businesses with an annual turnover exceeding £85,000. This threshold was later expanded, and from April 2022, all VAT-registered businesses are required to comply with MTD for VAT rules, unless exempted.

What do I need to do for MTD for VAT?

If you run a VAT-registered business and are not exempt from MTD, you must:

Keep business records digitally.
File VAT returns using MTD-compatible software.

Newly registering for VAT automatically enrolls you for MTD for VAT by HMRC.

Exemptions

Businesses can apply for exemptions from MTD for reasons such as:

Inability to use digital tools due to age, disability, or location.
Subject to an insolvency procedure.
Religious beliefs incompatible with electronic records.
Already exempt from filing VAT returns online.

What are digital records?

To be MTD-compliant, businesses must maintain digital records for VAT purposes using “functional compatible software. This software should:

Record and preserve digital records.
Provide HMRC with information and returns from the data held in those digital records.
Receive information from HMRC.

The functional compatible software can be a commercially available accounting package or a simple spreadsheet-based system. A ‘digital link’ via bridging software is necessary when filing the VAT return.

MTD for Income Tax

MTD for Income Tax is set to replace the annual Self-Assessment tax returns system. It will be applicable to self-employed individuals and landlords with yearly incomes above £50,000 from April 2026 and those with incomes over £30,000 from April 2027.

What do I need to do for MTD for Income Tax?

If you fall within the above categories, from April 2026, you must:

Keep your records in digital format.
Submit quarterly returns to HMRC, declaring your business/property income and expenses for the period.
Submit an end of period statement with the final taxable profit for the tax year.

Help with MTD

HMRC has released extensive guidance on MTD, available on the Gov.uk website. Many businesses are using this opportunity to modernise their bookkeeping systems and practices to comply with MTD while capitalising on efficient digital processes. If you need help to ensure MTD compliance and maximise the benefits of the digital revolution in accounting, feel free to reach out to us.

Conclusion

Making Tax Digital is an ambitious step towards a modern and streamlined tax system in the UK. As MTD continues to be implemented, it’s crucial for businesses and taxpayers to stay informed about the requirements and embrace digital solutions to optimise their tax reporting processes. By embracing the digital revolution in taxation, businesses can streamline operations, improve accuracy, and focus on growth and success in the digital age.

Company

Alpha Tax Solutions Ltd (CRN: 12957241) is a member of the Association of Chartered Certified Accountants. Firm registration no. 5509055.