Making Tax Digital (MTD) is the biggest tax shake up to date, with HMRC aiming to make the UK “one of the most digitally advanced tax administrations in the world”.
While there have been some shifting deadlines, MTD will be here to stay.
Read on for a closer look at some of the principal delays and changes to MTD, as well the incoming requirements across VAT, income tax and corporation tax.
Here’s what we cover:
What is Making Tax Digital?
A central pillar of Making Tax Digital is that taxpayers will give HMRC details of their revenue and costs at least four times a year, so there’ll be an accurate, up-to-date picture of how much tax is due throughout the year rather than leaving everything to an annual tax return.
HMRC is introducing Making Tax Digital in stages.
MTD for VAT began from 1 April 2019, meaning Making Tax Digital became law for VAT-registered businesses over the VAT threshold of £85,000.
Since April 2022, MTD applies to all VAT businesses (this includes those below the VAT threshold).
Then from April 2024, MTD for Income Tax Self Assessment (also known as MTD for Income Tax or MTD for ITSA) will come into force.
That means certain sole traders and landlords will need to start reporting their earnings using MTD. General partnerships will be included from 2025.
And no sooner than 2026, incorporated businesses will have to adhere to MTD for Corporation Tax.
HMRC claims Making Tax Digital will lead to a more effective and efficient tax system, allowing taxpayers to file their tax returns more easily and with greater accuracy.
For some, MTD will eventually mean giving HMRC more information and on a more regular basis, but most tasks required to complete the various steps of MTD will be automated.
Using cloud accounting software, you could use MTD as an opportunity to actually reduce your tax-related admin burden, leaving you with more time to focus on more value-added activities for your business.
Delays and changes to Making Tax Digital so far
According to the MTD policy paper first published by the government in December 2015, MTD was originally intended to go live for most businesses, including sole traders and landlords, by the end of 2018.
Implementation of Making Tax Digital has taken much longer than expected, with the government announcing various delays/changes:
- In mid-2017, the government announced it was giving taxpayers more time to adapt to MTD. Only businesses with turnover above the VAT threshold of £85,000 would need to switch to MTD for VAT, and only by April 2019. Furthermore, the government said no one would be asked to use MTD for other taxes and update HMRC on a quarterly basis until at least 2020.
- In 2020, with the onset of the coronavirus pandemic, the government signalled further delays to MTD as it sought to take the pressure off already struggling businesses. The so-called soft landing for MTD implementation was extended until April 2021. This meant digital linking rules were temporarily relaxed to allow copy and paste to continue for a limited period.
- In July 2020, the government said VAT-registered businesses that had signed up for voluntary VAT, with turnover below the £85,000 threshold, would need to switch to MTD from April 2022. It also said sole traders and landlords with turnover above £10,000 would need to follow MTD for Income Tax rules for their first full accounting period beginning after April 2023.
- In October 2020, the government announced that Making Tax Digital for Corporation Tax would only apply from 2026 at the earliest.
- In September 2021, the government postponed MTD for Income Tax until April 2024. This had been expected to become law in April 2023 and would have affected four million self-employed people and landlords with business/property income above £10,000.
What the delays and changes mean for you
While there have been some delays, HMRC has mapped a course to get taxpayers doing as much online as possible.
If you’re running a business, you’ll most likely need to switch to accounting software and get some digital capability going sooner or later.
As things stand, businesses with £10,000 or less in turnover won’t be required to follow MTD for Income Tax, though they could come under MTD for VAT rules if they are VAT registered.
The good news is that HMRC-recognised accounting software is available to ensure the switch to MTD is as seamless as possible.
Your accounting software will provide regular and timely data to HMRC, so getting ready for MTD is all about having the right software in place.
However, there might be more to get to grips with for those businesses that have never engaged with accounting software or apps before and those with little or no use of the internet in their business.
Taking the time now to get used to the software, ahead of the relevant MTD implementation dates, will certainly be beneficial. If you need support with it, speak to the software vendor or your accountant if you have one.
In addition, the delay to MTD for Income Tax means businesses that will need to adhere to its rules have more time to prepare.
Making Tax Digital for VAT software
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Making Tax Digital for VAT, Income Tax and Corporation Tax
Here’s a quick round up of what you need to know about the different stages of MTD.
VAT-registered businesses with taxable turnover above £85,000 have been required to follow Making Tax Digital rules since April 2019.
This means they must keep digital records and file VAT Returns through functional compatible software.
Since April 2022, VAT registered businesses under the threshold have been included – meaning all businesses that are VAT registered need to follow MTD for VAT rules.
Only those who can successfully argue ‘digital exclusion’ – those that can show they are unable to use apps and accounting software due to factors such as where they are based, religion or disability – are exempt.
Sole traders and landlords with more than £10,000 in annual turnover need to follow MTD for Income Tax rules from April 2024.
For general partnerships with more than £10,000 in annual turnover, they need to follow the new rules from April 2025.
Companies won’t need to report under MTD for Corporation Tax until at least April 2026.
HMRC hopes to begin a pilot scheme allowing companies to start filing using MTD for Corporation Tax from April 2024.
FAQs on MTD delays, changes and extensions
Can I still use bridging software for MTD?
Yes, you can use bridging software for filing VAT submissions with spreadsheets – with VAT Returns, you are now meant to include digital links with your original records.
You should also still be able to use spreadsheets with bridging software in MTD for Income Tax.
What is the deadline for MTD?
Since April 2022, virtually all VAT-registered businesses have to follow MTD for VAT, regardless of earnings.
Two years later, in 2024, sole traders and landlords with a turnover above £10,000 will come under the new MTD for Income Tax rules, while they will apply to general partnerships using this same turnover threshold from April 2025.
MTD for Corporation Tax will eventually apply to all incorporated companies, though this is not expected to be mandatory until at least April 2026 at the earliest.
Is there a delay to Making Tax Digital Phase 2?
Phase 2 can refer to the requirement for all VAT-registered businesses to apply MTD for VAT from April 2022.
However, the term can also be used in reference to the MTD for Income Tax go-live date, which is now from April 2024 for sole traders and landlords, and from April 2025 for general partnerships.
MTD for Income Tax had been scheduled to start from April 2023 but the government announced a delay in September 2021.
Has there been an extension to the soft landing for Making Tax Digital?
Yes, HMRC did announce a ‘soft landing period’ for businesses adopting MTD for VAT in April 2019, allowing them to continue copying and pasting from one application to another until April 2020.
Owing to the pandemic, the government extended the soft landing period for another year, until April 2021.
However, businesses should now be using proper digital links for VAT Returns – copying and pasting of data is no longer allowed.
There’s no expectation of a soft landing period for MTD for Income Tax.
Making Tax Digital is an opportunity to fully digitalise your tax admin.
The automation that cloud accounting software provides means most of the tasks associated with MTD can essentially be done for you.
That means you can spend more time running your business and creating value for your customers.
Editor’s note: This article was first published in November 2021 and has been updated for relevance.
Making Tax Digital for VAT checklist
Download your free (and easily printable) Making Tax Digital checklist and follow the steps to help you with your VAT Return processes.