Making Tax Digital: Where are we now?

What is Making Tax Digital?

Making Tax Digital requires businesses to keep digital records, use Making Tax Digital-compatible software and submit quarterly updates to HM Revenue and Customs (HMRC).

The main aims of Making Tax Digital are to:

• maximise tax revenue
• make the tax system more effective and efficient
• improve customer service
• make it easier for taxpayers to get their tax right

HMRC introduced the first phase of Making Tax Digital in 2019, which covered VAT. Making Tax Digital for Income Tax Self-Assessment is next on the cards, followed by Corporation Tax.

What is Making Tax Digital-compatible software?

Under the Making Tax Digital rules, businesses must use compatible software. This can be either:

• traditional spreadsheets, or non-compatible software, and connect to HMRC systems using ‘bridging software’
• fully compatible software packages.

Fully compatible software, such as QuickBooks and Xero, will make the process much simpler. They are cloud-based digital platforms that have many advantages over traditional record keeping. The software uses your business’ information to show your current tax data in real time and can help you to spot any possible errors. You and your accountant can use the software to submit updates directly to HMRC.

Making Tax Digital: What has happened so far?

Making Tax Digital for VAT

Businesses that are VAT-registered must keep digital records and use MTD-compatible software to submit VAT returns.

For more details on the requirements for businesses under Making Tax Digital for VAT, read this guide.

Business tax account

As part of Making Tax Digital, individuals, sole traders, partnerships and limited companies have access to an online business tax account. It can be used to check their tax position for over 40 taxes including self-assessment, VAT, PAYE and corporation tax.

Making Tax Digital: What will happen next?

Making Tax Digital for Income Tax Self-Assessment

Making Tax Digital for Income Tax Self-Assessment (ITSA), also known as Making Tax Digital for Income Tax, was originally scheduled to begin April 2018 but has suffered from a series of delays.

​Sole traders and landlords

• For sole traders and landlords with business or property income above £50,000, MTD for ITSA will start from April 2026
• For sole traders and landlords with business or property income above £30,000, MTD for ITSA will start from April 2027

The Government announced at the Autumn Budget that MTD will be rolled out for sole traders and landlords with business or property income between £20,000 and £30,000 'by the end of this Parliament', with more information to follow.

For further HMRC guidance please click here.

General partnerships

The Government remains committed to extending Making Tax Digital for Income Tax Self Assessment to partnerships. HMRC planned for this to take place from April 2025, but it has not announced a revised date.

Exemptions

Exemption to MTD for ITSA will apply for:

• Digitally excluded individuals, if the following conditions apply:
  * impractical because of location, disability, age or another reason, or
  * your beliefs in your religious society or order are against the use of electronic submissions or retention of electronic records.
• Those without a National Insurance Number
• Foster carers

You need to make an application to HMRC, including details of your personal circumstances. You can find HMRC guidance on the application here.

Threshold guidance

To determine if the thresholds for Making Tax Digital for Income Tax Self-Assessment apply, there are some important points to note:

• The thresholds apply to gross income/turnover, not profit
• It applies to the total gross income where the individual has more than one trade or property business.

For example, if you have rental income of £15,000 and £40,000 of self-employed sales will need to comply with MTD for ITSA from April 2026.

Quarterly updates

Taxpayers will need to keep digital accounting records and use MTD-compatible software to submit quarterly updates to HMRC. These updates are summaries of income and expenditure and will be cumulative. Businesses can therefore correct and amend submission throughout the year rather than having to resubmit previous quarterly updates. After submission of an update you'll be able to see an estimate of your tax bill.

The following deadlines will apply:

	Period covered	Filing deadline
1st quarterly update	6th April to 5th July	5th August
2nd quarterly update	6th July to 5th October	5th November
3rd quarterly update	6th October to 5th January	5th February
4th quarterly update	6th January to 5th April	5th May

If preferred, businesses can choose to use a calendar quarters instead:

	Period covered	Filing deadline
1st quarterly update	1st April to 30th June	5th August
2nd quarterly update	1st July to 30th September	5th November
3rd quarterly update	1st October to 31st December	5th February
4th quarterly update	1st January to 31st March	5th May

You can send updates to HMRC more frequently, if preferred. This may help you to understand how the transactions may affect your estimated tax bill.

Our current understanding is that if you have more than one business, you must make separate submissions for each business. If you have more than one property that you receive income from, these are treated at “UK property business” or “Overseas property business”.

Landlords with jointly-owned properties will be able to choose not to submit quarterly updates and keep less detailed digital records to simplify the transfer between joint owners.

End of year

At the end of your accounting period, you will need to finalise and submit a final declaration. This declaration presents a finalised position across all business sources and replaces the Self-Assessment tax return.

Tax payments

Although the Government is changing the way individuals report income tax, the timing of tax payments remains the same. The current system of payments on account and balancing payment by 31st January/31st July is expected to remain.

Making Tax Digital for corporation tax

Making Tax Digital for corporation tax (CT) will affect incorporated businesses that pay corporation tax. The Government has not announced the introduction date for Making tax Digital for Corporation Tax.

HMRC has not confirmed full details, but we expect that the changes will be similar to those for Income Tax.

Need help with Making Tax Digital?

TaxAssist Accountants can provide support on complying with Making Tax Digital and choosing the most appropriate Making Tax Digital-compliant reporting software for your business.

To book a free initial consultation on your Making Tax Digital obligations, contact our friendly and experienced team on 0131 654 1771. Alternatively, you can fill in the online enquiry form.

Last updated: 8th November 2024