The idea behind Making Tax Digital (MTD) is to make the tax system “more effective, more efficient, and easier for taxpayers to get their tax right”, but make no mistake – it’s not optional.
Since April 2019, VAT-registered businesses with turnover above the £85,000 VAT-registration threshold have been legally required to report under MTD, and from April 2024, self-employed business owners and landlords will need to do the same.
Under current plans, it will also extend to corporation tax from April 2026, eventually bringing the vast majority of businesses into a fully digitised system of tax record-keeping and reporting.
That might sound daunting, and it’s certainly important to take the new rules seriously, but complying with the scheme itself is actually a lot more straightforward than you might think. With the right software in place, you’ll be MTD-ready in no time.
Here’s what you need to know, and what you need to do about it.
What is MTD?
MTD is a Government-led programme to get people and businesses recording and reporting their tax information online.
The scheme has been rolling out slowly for a few years now, but some more important stages are now on the horizon, with legislation in place for the next major phase set to take place in 2024.
Broadly speaking, the scheme’s main requirements are:
- Digital record-keeping. HMRC wants to discourage people from the old cliche of keeping their receipts in a shoebox all year and adding everything up when they fill out their tax return. Instead, MTD requires taxpayers to keep their records in a digital format – preferably one that minimises manual data entry – and submit quarterly returns.
- Using software to submit updates to HMRC. Under MTD, taxpayers must use software that can connect to HMRC’s application programming interface (API) so data can be transferred directly from their records. Again, this reduces manual input and the risk of errors.
MTD for VAT: extending from April 2022
VAT-registered businesses with a turnover above the VAT-registration threshold are already required to comply with the rules for MTD, since the first compulsory stage of the scheme rolled out in April 2019.
From next year, though, this will extend to all VAT-registered businesses, regardless of their turnover. HMRC estimates this will affect 1.1 million smaller businesses below the VAT-registration threshold.
MTD for income tax self assessment (ITSA): from April 2024
Unincorporated business owners and landlords with a taxable income of more than £10,000 will be required to follow MTD rules from April 2024.
The biggest change for those taxpayers is that they’ll be required to provide HMRC with four quarterly updates through compatible software throughout the year.
They’ll then need to send an annual ‘final declaration’ to confirm the details for the tax year and include any personal income and reliefs. Eventually, this is expected to replace the annual self-assessment tax return.
General partnerships: from April 2025
General partnerships will also be included in MTD for ITSA, but they’ll have an extra year to prepare.
This applies to unincorporated partnerships that are only made up of individuals – not limited liability partnerships, mixed or corporate partnerships, for example.
MTD for corporation tax: from 2026
Between November 2020 and March 2021, the Government ran a consultation on the future design of MTD for corporation tax.
Under the plans outlined in this consultation, this new phase of the scheme will not be mandated before 2026, and will include a pilot scheme, similar to the one that ran for income tax.
We can expect more details on this in the future.
How should you prepare for MTD?
The main changes brought about by MTD are to do with digital methods of record-keeping and filing – so the best way to ensure you’re prepared is to get MTD-compatible software in place.
While it is possible to meet the scheme’s requirements with a combination of spreadsheets and bridging software that connects your data to HMRC’s online platform, we’ve found that the smoothest, most convenient option is an all-in-one package like Xero cloud accounting.
As well as being HMRC-approved for the purposes of MTD, Xero comes with a range of other benefits for anyone running a business.
It’s convenient, with real-time information accessible across your devices, and it offers sophisticated insights into your data – information that’s invaluable for us when we’re helping you to plan ahead and strategise.
Give us a call to get your small business set up with Xero.