Making Tax Digital Accountants

A Guide to Making Tax Digital (MTD Guide)

Since the government announced its plans for Making Tax Digital in 2019, HMRC has begun to make changes in the way millions of businesses record and pay their taxes.

Making Tax Digital for VAT is already in operation and businesses have been required to be registered since April 2022.

In addition, making tax digital for income tax will affect the self-employed and property owners with more than £10,000 income from April 2024 onwards with partnerships to follow April 2025 and corporation tax to follow in the next few years.

So what does this all mean for your business?

Keep reading for a comprehensive look at MTD, specific deadlines for registering, and how to comply with the regulations (including the best software for making tax digital).

What is Making Tax Digital?

Making Tax Digital, also referred to as MTD, is a change in the way individuals and businesses are expected to report and pay tax. It is designed to make it easier for you to keep on top of your affairs and for HMRC to receive information more regularly.

HMRC’s plan is to be one of the most digitally advanced countries when it comes to tax administration. MTD is a fundamental change in the way the tax system works to make it more effective, more efficient, and easier to get your tax right.

The changes are not being all rolled out at once but in the long run, will apply to VAT-registered businesses and self-employed and landlord income tax, followed by partnerships and companies in future years.

MTD for VAT-registered businesses is already in effect and you are expected to be registered for the service unless you have a valid exemption.

Self-employed and landlords with income over £10,000 can already register for MTD but there is no obligation to register until April 2024. (Partnerships April 2025)

As for corporation tax, this will be rolled out in future years. To start with, companies can join a pilot scheme but it is not going to become mandated until at least 2026.

What Do the Changes Mean?

To comply with MTD, businesses must keep digital financial records. This must be done in what HMRC refers to as ‘compatible software’. Put simply, you will be required to connect the software directly to HMRC in order to file your tax returns.

The connection is known as a ‘digital link’. HMRC defines a digital link as having two key characteristics:

• Data is electronically transferred between software programs or applications. This link can include a linked spreadsheet cell with automated formulas.

• Automated transfer that does not require any manual actions like copying and pasting data or other ways of manually moving data between multiple pieces of software.

In effect, HMRC wants all your data to be input into a single piece of software and automatically sent to them with a single click of a button.

How Do You Register for Making Tax Digital

You or your accountant can register for MTD (VAT and Income Tax) directly on the HMRC website. 

If you don’t already have a Government Gateway account for your business you will need to create one.

Along with this registration, you will need to find software that’s compatible with making tax digital. Keep reading for our top picks!

Making Tax Digital for VAT

MTD affects your VAT accounting process and the way in which business stores and submits information. Within these digital accounts you’ll need to record:

• Your business name and address

• VAT registration number

• VAT accounting schemes

• The amount of VAT on goods and services you supply

• The amount of VAT on goods and services you receive

• Adjustments that you make to your returns

• Source of VAT Transactions (UK, Europe and Rest of World)

• Time of supply and value of supply (value excluding VAT) for everything you buy/sell

• Rate of VAT charged on goods and services you supply

• Reverse charge transactions

• Total daily gross takings (if you use a retail scheme)

• Items you can reclaim VAT on (if you use the Flat Rate scheme)

It’s worth noting that the new rules don’t change your regular VAT return deadlines.

Making Tax Digital for Sole Traders and Self-Employed

MTD for income tax is set to have a huge change in the way millions of people such as sole traders and landlords deal with taxes.

The rules will only apply to people who have applicable income over £10,000 across their properties or business.

The £10,000 threshold applies to gross income or turnover, rather than profit. Adding to this, it applies to total gross income if you have multiple trades or property businesses.

From 6 April 2024, all eligible businesses and landlords are required to keep digital records of all income and expenses via compatible software. This requires you to purchase or use a free version of software to be compliant.

In preparation, HMRC is working with software providers to ensure small businesses have access to affordable products. The government is also committed to the availability of free software for small businesses with simple affairs.

If you are below this threshold, you have the option to continue with the current self-assessment system.

In rare cases, there are exemptions to MTD which include:

• It’s not reasonable for you to use digital tools due to age, disability, or lack of internet due to remote locations. This is often referred to as digital exclusion.

• Subject to an insolvency procedure

• Business is run by practising members of a religion whose beliefs are incompatible with using electronic communication

If you feel you require an exemption you must apply directly to HMRC with your reason.

In addition, Trusts, Estates, Trustees of Registered Pension Schemes, and Non-Resident Companies are exempt from MTD.