Making Tax Digital – is it over yet?

This the article has been updated since it was published because of the changes announced in December 2022.

Making Tax Digital (MTD) has been around for the last few years, and many people may think it is all over now that the final phase of MTD for VAT has been introduced.  As Winston Churchill once said, “this is not the end, this is not even the beginning of the end, this is perhaps the end of the beginning”.

Here is the current roadmap for MTD beyond VAT, bringing in MTD for Income Tax Self-Assessment (ITSA) and Corporation Tax (CT).

A recap of MTD for VAT

Since 2019 this has been in-place for VAT registered businesses with taxable turnover above £85,000.

For those that are under this threshold this now impacts you as MTD for VAT now need to be complied with by all VAT registered businesses unless and exemption has been approved by HMRC. This includes nil returns. If you hadn’t done so already, HMRC will have automatically signed you up.

Many people simply assume that MTD for VAT is just about electronically submitting their VAT returns and because they use an online software such as Xero that they are compliant. However, MTD for VAT has 3 requirements:

1. Maintain digital records
2. Have digital links in place
3. Submit digitally to HMRC

While firefighting through the pandemic many may have missed requirement 2 being the end of the soft-landing period in April 2021, which saw the introduction of mandatory digital links between your accounting data. It is therefore important to review your processes and ensure you meet the digital links requirements.

Read more about digital links here

MTD for ITSA who is impacted?

Phase 1 will be introduced in April 2026 impacting:

1. Sole traders with turnover greater than £50k
2. Rental income greater than £50k
3. Combined self-employment & rental income of greater than £50k

Phase 2 will be introduced in April 2027 impacting:

1. Sole traders with turnover greater than £30k but less than £50k
2. Rental income greater than £30k but less than £50k
3. Combined self-employment & rental income of greater than £30k but less than £50k

A date has not yet been released for:

• Sole traders and landlords with income less than £30k
• General partnerships
• LLPs and complex partnerships (such as those with corporate members)

HMRC have indicated the following will be exempt:

• Trust
• Estates
• Trustees of registered pension scheme
• Non-resident companies

MTD for ITSA the process

HMRC are yet to release full detail on MTD for ITSA but have shared some initial legislation, so we do know partly what to expect from the process. We anticipate more detail from HMRC in the coming months.

For each separate business/trade you will need to:

On top of these individual business/trade submissions, individuals will be required to submit a Final Declaration, which will replace the current self-assessment tax return and declare all income sources for an individual and calculate the tax position.

Therefore, someone with a sole trade business and a property business will need to make 11 submissions, rather than the usualone personal tax return a year. This is where an online accounting solution will be a lot easier than an excel spreadsheet or a desktop solution as it will allow effective collaboration with your advisor & simpler submissions to HMRC.

Online accounting isn’t just for the accountant or the tax man, there are a wealth of benefits for you as a business owner detailed here.