Keeping up with the times: A comprehensive guide to Making Tax Digital (MTD)

Making Tax Digital is a UK government initiative to encourage businesses and individuals to keep their tax accounts up to date and in a digital format. Before this initiative, the format typically used varied from person to person and business to business, depending on their preference. Some companies and individuals used paper-based systems, such as physical ledgers and receipts, while others used electronic formats, such as spreadsheets or accounting software.

As the world becomes increasingly digital, it’s no surprise that the tax administration is following suit! In this handy guide, we will give a comprehensive outline and overview of what Making Tax Digital is, who it applies to, how to comply with the rules, the timeline for implementation, positive and negative comments on the program, and its impact on the UK tax system. In addition, this article will discuss the development of the program and the benefits of Making Tax Digital for taxpayers and HMRC.

What is Making Tax Digital?

Making Tax Digital (MTD) is an HMRC initiative encouraging individuals and businesses to update their accounts digitally. MTD aims to help make tax administration more efficient. The program’s development began in 2015 when HMRC proposed the Digital Tax Accounts (DTA) initiative. In 2016, the government introduced the MTD program as part of its plans to digitalise the tax system. The program aimed to reduce the tax gap by requiring individuals and businesses to keep digital records, use MTD-compliant software and submit returns quarterly, bringing the tax system closer to real-time.

The benefits of MTD include making it easier for businesses and individuals to get their tax right. Customers can integrate tax management with a range of business processes through software, contributing to wider productivity gains for businesses by encouraging digitalisation. The program will help reduce the amount of tax lost to avoidable errors due to improved accuracy of digital records, additional help built into many software products, and digital records sent directly to HMRC. HMRC recently published evidence of MTD reducing the tax gap.

Who does Making Tax Digital apply to?

Making Tax Digital applies to most businesses and individuals who file VAT returns and income tax self-assessments.

VAT-registered businesses above the threshold of £85000 have been required to keep digital records and file their tax returns using compatible software since April 2019. From April 2022 onwards, VAT-registered businesses with a taxable turnover below the threshold have also been required to meet the MTD requirements for tax return submission.

If you are self-employed or a landlord with an annual business or property income of more than £50,000, you must follow the MTD for Income Tax requirements from 6 April 2026. If you have a business or property income of more than £30,000 annually, you need to follow the requirements from April 2027. For those with income of less than £30000, the government will review the needs of these smaller businesses at the end of 2023 and then lay out plans for how MTD will apply to this group.

Exemptions and deferrals are available for certain groups, such as those who cannot use digital tools due to age, disability, or location. The exemption process requires applicants to provide evidence of their circumstances, and applications must be made to HMRC.

What do people/businesses need to do to comply with the rules?

People and businesses must maintain digital records, use software that works with MTD, and submit tax returns quarterly instead of annually to be MTD compliant. The software must be capable of recording and preserving digital records and transmitting information to HMRC. Examples of software and technology that can support MTD compliance include cloud-based accounting software, Excel spreadsheets, and digital record-keeping apps.

The Dates of Making Tax Digital

Making Tax Digital has been rolled out in stages, with different requirements and deadlines depending on the type of taxpayer and their specific circumstances. Here is an overview of the timeline for the introduction of MTD:

MTD for VAT

MTD for VAT was introduced in April 2019, requiring all businesses with a taxable turnover above the VAT threshold to keep digital records and file their VAT returns using compatible software. From April 2022, this requirement was extended to all VAT-registered businesses, regardless of their turnover. All VAT returns must now be submitted through MTD-compatible software, and manual returns are no longer accepted.

MTD for Income Tax

MTD for Income Tax will be launched in stages, starting from April 2026. Self-employed individuals and landlords with a turnover above £50,000 will be required to maintain digital records and submit tax returns to HMRC every quarter using MTD-compatible software. From April 2027, this requirement will be extended to those with a turnover above £30,000. There is no announcement yet for individuals and businesses with a turnover of less than £30000.

MTD for Corporation Tax

MTD for Corporation Tax is currently in development and is expected to be rolled out in 2026 at the earliest. All companies liable to pay corporation tax must keep digital records and submit their tax returns using compatible software from that date onwards.

It is essential for taxpayers to be familiar with the deadlines for compliance with MTD, as failure to comply can result in penalties and fines.

Positive and Negative Comments on Making Tax Digital

Since its introduction, MTD has received a mixed response from different UK bodies, such as business groups, professional associations, and tax experts. Here are some of the key arguments in favour of and against MTD:

Arguments in favour of MTD:

• Increased accuracy and reduced errors: By requiring businesses and individuals to keep digital records and submit tax returns more frequently, MTD can help reduce errors and improve the accuracy of tax records.
• Improved efficiency: By automating many of the processes involved in tax administration, MTD can help businesses and individuals save time and reduce costs.
• Better integration with other business processes: MTD requires businesses and individuals to use compatible software to manage their tax records, which can be integrated with other business processes such as accounting and invoicing.
• More timely and transparent reporting: MTD requires businesses and individuals to submit returns more frequently, which can provide a more timely and transparent picture of their tax position.

Arguments against MTD:

• Increased costs: Many businesses and individuals will need to invest in new software and hardware to comply with MTD, which can be costly.
• Complexity: The requirements for MTD can be complex and challenging to understand, particularly for small businesses and self-employed individuals who may not have the resources to implement the necessary changes.
• Privacy concerns: By requiring businesses and individuals to keep digital records and submit tax returns more frequently, there are concerns about the privacy and security of sensitive financial information.
• Limited benefits: Some critics argue that the benefits of MTD are overstated and that it is unlikely to impact tax compliance or revenue collection significantly.

Despite the mixed response to MTD, there have been some positive examples of businesses and individuals who have already implemented the system. For example, a study by HMRC found that MTD had reduced the tax gap to VAT-registered firms and that businesses had reported improvements in their record-keeping and cash flow management.

Conclusion

In conclusion, Making Tax Digital is an HMRC initiative to encourage businesses and individuals to keep their accounts up to date and in a digital format. The program is part of the government’s Tax Administration Strategy aimed at digitalising the tax system, aiming to make tax administration more efficient and reduce the tax gap. MTD applies to most businesses and individuals who file VAT returns and income tax self-assessments. People and businesses must keep digital records, use MTD-compliant software and submit returns quarterly to be MTD-compliant. MTD has been rolled out in stages, with different requirements and deadlines depending on the type of taxpayer and their specific circumstances. There are arguments for and against the program. Still, evidence suggests that it has increased accuracy, reduced errors, improved efficiency, and contributed to broader productivity gains for businesses by encouraging digitalisation. Taxpayers must keep themselves informed about the deadlines for compliance with MTD, as failure to comply can result in penalties and fines.