Making Tax Digital: what it means for you

Making Tax Digital (MTD) is a government initiative that aims to give the UK a digitally advanced tax administration.

What is Making Tax Digital (MTD)?

MTD is designed to help businesses and individuals improve their tax administration so that it is more effective, more efficient and easier to do correctly. Put simply, MTD involves using compatible software to manage your tax affairs with HMRC.

What does ‘compatible software’ mean?

While it’s possible to use spreadsheets alongside ‘bridging software’, many businesses and their accountants choose comprehensive programs. These use the data from your business’s day-to-day business activity to build an accurate picture of its tax data in real time, highlighting possible errors and offering prompts for information that might otherwise be overlooked. Once your software has compiled the relevant data, you or your accountant submit it directly to HMRC, via a computer or smartphone.

HMRC has stated that “users will get the maximum benefits from MTD – fewer errors, increased productivity and better financial planning – by using dedicated MTD software”.

Making Tax Digital: the story so far

The first major stage of MTD began on 1 April 2019, requiring VAT-registered businesses with a turnover above the VAT registration threshold to with a turnover above the VAT registration threshold of £85,000 to file VAT returns using MTD-compatible software. They also have to store financial records relating to VAT digitally.

Another key development is that every small business owner and individual taxpayer now has access to an online business tax account that they can use to check their HMRC records and manage their details.

In March 2020, the government reported that more than 1.4 million businesses had signed up for MTD for VAT and that more than 4 million VAT returns had been submitted using MTD-compatible software.

Elsewhere, HMRC has reported that more than 280,000 businesses with a turnover below the VAT threshold have signed up to MTD for VAT voluntarily in order to “experience the benefits digital record-keeping has to offer”. It also says that some business owners experienced a smooth transition to digital VAT filing, while others – “particularly those continuing to use spreadsheets with bridging products” – found the transition more difficult.

It is thought that those who are the most digitally engaged save a day a week in administration, and that businesses that fully integrate their accounting and tax software report they spend less time on tax.

What’s next for Making Tax Digital?

As the rollout of MTD continues, here’s what we can expect to happen next:

Making Tax Digital for VAT

The scope of MTD for VAT will expand in 2022. VAT-registered businesses with a taxable turnover below £85,000 will need to follow MTD rules for their first VAT return starting on or after April 2022.

Making Tax Digital for income tax self-assessment

MTD for income tax will be introduced in 2024. Self-employed people and landlords with annual business or property income above £10,000 will join MTD for income tax self-assessment from 6 April 2024.

Partnerships with individuals as partners will have to follow the rules from April 2025. Limited liability partnerships (LLPs) and partnerships with corporate partners will be required to join, although no date has been set.

Making Tax Digital for corporation tax

MTD for corporation tax is expected to be the next phase in the initiative, but new rules won’t come into effect until at least 2026.

This article was originally published by FreeAgent.

This material is published by NatWest Group plc (“NatWest Group”), for information purposes only and should not be regarded as providing any specific advice. Recipients should make their own independent evaluation of this information and no action should be taken, solely relying on it. This material should not be reproduced or disclosed without our consent. It is not intended for distribution in any jurisdiction in which this would be prohibited. Whilst this information is believed to be reliable, it has not been independently verified by NatWest Group and NatWest Group makes no representation or warranty (express or implied) of any kind, as regards the accuracy or completeness of this information, nor does it accept any responsibility or liability for any loss or damage arising in any way from any use made of or reliance placed on, this information. Unless otherwise stated, any views, forecasts, or estimates are solely those of the NatWest Group Economics Department, as of this date and are subject to change without notice.

scroll to top