What is Making Tax Digital all about? While it might seem a little confusing initially, this government scheme is here to help you.
Making Tax Digital (also known as MTD) is a government initiative that aims to make the tax admin for VAT, income tax self-assessment, and eventually corporation tax simpler and more efficient. It’s doing this by making it all digital.
The scheme doesn’t involve any changes to tax laws, but it does make for more accurate reporting, which may see previous errors on either side corrected.
We’ll take you through what you need to know.
What does tax going digital mean?
As the name suggests, Making Tax Digital is a new taxation system that’s paperless and fully electronic. It includes Making Tax Digital for VAT, which applies to VAT-registered companies, and Making Tax Digital for Income Tax, which is for self-employed people and landlords.
By now, all VAT-registered companies must be signed up to Making Tax Digital for VAT, and any new VAT-registered companies will be enrolled in it automatically.
Initially, self-employed people and those earning income through property rental were meant to move over to Making Tax Digital for Income Tax from April 2024. Pandemic delays have seen this date moved forward, however, and a phased approach will begin in April 2026.
Here are some of the scheme’s key features:
More frequent submissions
Instead of filing yearly tax returns, Making Tax Digital requires that you submit records every three months.
While this may seem like more work initially, it does mean that you’ll be able to keep on top of your tax liability and how much you owe, avoiding any unpleasant surprises at the end of the tax year. This ongoing system also allows you to monitor your business’s profits and cash flows more closely.
Specialised accounting software
All submissions are to be made digitally through specialised accounting software. This software must be able to communicate with HMRC through a digital link, keep and maintain digital tax records, and prepare returns.
If you already use a digital accounting system, the shift will be fairly straightforward.
If your business uses a paper-based bookkeeping system, you will need to buy the appropriate software to upload your details to HMRC’s interface. The government lists approved suppliers on its website to get you started.
If your business uses spreadsheets for accounting, there’s bridging software available to help you upload your spreadsheets to HMRC.
Is Making Tax Digital compulsory?
Yes, in most instances, Making Tax Digital for VAT is compulsory if you’re a VAT-registered business (there are some exceptions, we’ll get there in a minute).
If you’re self-employed or earn income through a rental property, Making Tax Digital for Income Tax isn’t compulsory yet – but it will be in the future.
Who will be exempt from Making Tax Digital?
There are certain exemptions to registering for Making Tax Digital. They include businesses subject to an insolvency procedure and people whose age, disability, religion, or business location make it unreasonable, impractical, or impossible to use computers, software, or the internet.
To apply for an exemption you must write to HMRC with your VAT registration number, business name and address, details of how your VAT return is currently submitted, and the reason you believe yourself to be exempt from Making Tax Digital.
If you find Making Tax Digital tricky due to slow broadband speeds because your small business is located in a rural area, you may be eligible for a Gigabit Voucher if you meet certain criteria.
When does tax go digital?
VAT-registered businesses earning over £85,000 have been required to keep digital records and submit their returns through Making Tax Digital since April 2019. As of 1 April 2022, this broadened to include those with a threshold turnover of under £85,000.
If you are registered with the Making Tax Digital for VAT programme, remember that you must remain Making Tax Digital compliant even if your turnover dips below the threshold. This will only change if you decide to cancel your VAT registration.
What about Making Tax Digital for self-employed people? Well, those who are self-employed and earning income through property rental with turnovers of over £50,000, will need to submit their self-assessment returns through Making Tax Digital from April 2026. Those earning over £30,000 will join them in April 2027.
Making Tax Digital for corporation tax won’t be mandated until April 2026, though a pilot could be launched in 2024.
What is Making Tax Digital for Income Tax?
Let’s take a look at this aspect of the scheme in a bit more detail, since it will roll out over the next few years.
Making Tax Digital for Income Tax is for freelancers, sole traders, and landlords earning more than £50,000 a year. It’s due to launch in April 2026.
Similarly to VAT-registered businesses, you will have to submit digital tax returns throughout the year rather than once yearly.
Your annual self-assessment income tax return will be replaced by four quarterly submissions. This means you will be able to check in with HMRC at any time to see how your tax stands, again allowing you to avoid any nasty shocks when it comes time to pay.
At the end of the tax year, you’ll submit an end of period statement (EOPS) to adjust and confirm your submissions to date, as well as by a final adjustment declaration. HMRC will then confirm the tax you owe, which must be settled by 31 January of the following tax year.
What do I do to make my tax digital?
And now, the whos, hows and whys of Making Tax Digital for Income Tax.
Who can sign up for Making Tax Digital?
While it’s not compulsory for self-assessment tax returns to be done via Making Tax Digital yet, you may be able to get a head start and sign up early.
You can do this if:
- Your details are kept up to date by HMRC
- You are a UK resident
- You have a National Insurance number
- You are registered for self-assessment
- Your accounting period runs from 6 April to 5 April
- You have submitted at least one self-assessment tax return
- You have either an existing self-employment income or a property income source
- Your tax records are up to date without any outstanding obligations
Getting ahead of the game will allow you to get used to the system before the deadline hits.
How to sign up to make my tax digital
You can sign up for Making Tax Digital through the Gov.uk website or through your accountant.
You’ll need to make sure you have software that works with Making Tax Digital for Income Tax before you can submit your returns.
When signing up make sure you have the following information on hand:
- Your business start date or the date at which you started receiving property income
- Your accounting method
- Your business name, address and the nature of your business for self-employment income sources
- The Government Gateway user ID and password you use to file returns (you must be registered to file self-assessment tax returns)
- Your National Insurance number
- Your Unique Tax Reference number
What are the benefits of Making Tax Digital for Income Tax?
Being a freelancer is tricky enough, and getting to grips with new systems is often daunting, but there are quite a few advantages of Making Tax Digital for Income Tax. Once you get your head around the new systems you’ll likely find:
- Filing, keeping on top of and submitting returns becomes quicker and more efficient
- Some record changes will be able to be done online rather than via a call centre or having to write in
- There’s improved data security
- It’s easier to keep an eye on your tax in process or “real time” rather than just once annually
- Communicating with your accountant becomes easier through standardised software
- It’s easier to pay the tax you owe through the online system
- The new Making Tax Digital system allows for fewer mistakes and more accurate accounting, leading to fewer incorrect payments
- Finally, paperless is undeniably more sustainable and eco-friendly
If you still need to register for Making Tax Digital for Income Tax, there’s no time like the present.
Less paperwork, fewer mistakes, more efficient record-keeping that’s centralised and provides immediate access to up-to-date financial information will make your business life easier. Leaving you time to focus on what’s next for your company.
Get on it and get ahead!