Making Tax Digital - overview
In recent years the government started phasing in its landmark Making Tax Digital (MTD) initiative. It also outlined a vision to modernise the UK’s tax system, with digital tax accounts replacing tax returns for ten million individuals and five million small businesses.
As part of the regime, taxpayers must move to a fully digital tax system, with businesses and individuals required to register, file, pay and update their information using a secure online tax account.
Businesses will eventually be required to supply up-to-date information in respect of their income tax and national insurance contributions (NICs). Updates will need to be made at least quarterly.
Making Tax Digital for VAT
Making Tax Digital for VAT (MTDfV) is now mandated for all VAT-registered businesses. This means that even voluntarily registered businesses, trading below the current £85,000 compulsory VAT registration threshold, will have to keep the requisite digital records and file digitally. VAT registered businesses must have digital links in place between all parts of their functional compatible software. A digital link is an electronic or digital transfer, or exchange of data, between software programmes, products or apps.
If this affects you, and you would prefer to consider deregistering for VAT, we are happy to discuss this with you.
Only a small handful of businesses are exempt from complying with MTDfV. Please contact us if you believe your business may be exempt. Businesses are able to make an appeal against a HMRC refusal of exemption.
Those businesses that fall within the scope of MTDfV are required to submit their VAT returns using software compatible with the MTDfV regulations. Information will be extracted from the digital records in order to populate the VAT return.
The changes introduced as part of the MTDfV project do not affect the statutory VAT return deadlines or payment dates, and businesses who choose to submit VAT returns monthly or annually can continue to do so.
Using third party software and keeping digital records
HMRC do not provide MTDfV software, and manual record keeping is not acceptable. Businesses must keep specified records in ‘functional compatible software’, which calculates the VAT return and submits it to HMRC via an Application Programme Interface (API).
MTD for Income Tax Self Assessment 2026
MTD for Income Tax Self Assessment (MTD for ITSA) was due to come into effect from April 2024, but the Government has delayed the roll out until April 2026 at the earliest.
MTD for ITSA means major change: more involvement with HMRC on an ongoing basis, more deadlines, more filings and more input from HMRC in return. The yearly timetable will feel very different until the system becomes familiar. The income tax rules themselves, other than those relating to recordkeeping, aren’t changing.
The eligibility criteria for MTD for ITSA has also changed. It will now apply to unincorporated businesses, self-employed individuals and landlords with total annual business or property income above £50,000 for the first accounting period starting on or after 6 April 2026. Those who have an annual income over £30,000 will have to comply with MTD for ITSA from April 2027.
The Government is currently reviewing the situation with regards to partnerships and also people earning between £10,000 - £30,000 a year and how MTD for ITSA can be best applied to their situation.
Businesses and landlords in MTD for ITSA will have to keep accounting records digitally, using software or a spreadsheet. They will be required to send a summary of business income and expenses to HMRC each quarter. As well as these four quarterly filings, there will be digital end of year finalisation.
Whilst the roll out of MTD ITSA has been delayed, there are numerous benefits for self-employed individuals and landlords to move to a digital record keeping system. Not only will this help you be prepared for the future MTD for ITSA regulations, but it will also help you to improve your understanding of how your business is performing. Having up to date information on all our income and expenditure can help you to better manage your cashflow, help you to budget for the next few months and also help you to make better and faster business decisions.
Rather than seeing the delay in MTD for ITSA implementation as a reason to forget about it for the time being, we would urge those who will be affected by it to start the move to digital record keeping, sooner rather than later.
Please contact us for further details on MTD for ITSA and how to move to a digital accounting record system.
Changes to the basis period
One announcement which the Government is still going ahead with is the change to the basis period reform. At the moment all unincorporated businesses can choose what date they want to have as their year-end, yet their income tax is calculated on the tax year basis (6 April – 5 April).
However, from April 2024 all self-employed individuals and unincorporated businesses will have to have their accounting period coterminous with the tax year year-end.
This may require you to change your current accounting period. If this is the case, we can advise you on how to go about this and whether to make the transition in 2023 or 2024. If this applies to you, please contact us to discuss how best to action this change.
Cloud accounting services are the simple way of enabling software to be stored and accessed online. This way of accounting serves similar functions as accounting software that would be stored on your computer but is hosted on remote servers.
There are many benefits of making use of cloud accounting. Its ease of access is one of the primary advantages associated with cloud-based accounting: with these services, you and your employees will be able to access essential data anywhere at any time.
Your data is securely stored and backed-up in the cloud: you will not be filling up valuable storage space on your hard drive. Cloud accounting services utilise real time information, meaning that your data will always be up to date and current.
It is clear to see that cloud accounting is the way forward: its ease of use, accessibility and cost effectiveness ensures that it remains a popular choice for many businesses.
Walker Moyle support most cloud accounting software packages which our clients use, including Xero, QuickBooks, Sage and others.
We can explain the MTD rules and how they affect your business or personal circumstances. Simply contact us today for practical advice and guidance.