Making Tax Digital
Making Tax Digital – VAT and Income Tax
In 2019 HMRC began the rollout of its revolutionary system for collecting taxes, the Making Tax Digital (MTD) programme. The aim being to update the UK tax system with a digital platform that enables taxes to be collected accurately and seamlessly.
MTD was initially rolled out to VAT registered businesses with a turnover above the VAT threshold (£85,000) in April 2019. Phase 2, which took effect from April 2022, brought in VAT registered businesses with a turnover below £85,000 into the scheme. However, from April 2026 MTD will focus on individual Income Tax and Self Assessment taxpayers, with partnerships and corporation tax due to follow at a later date (yet to be confirmed).
In order to comply with MTD, businesses and individuals caught by the regulations will have to use MTD compatible software to transfer their accounts and income data into HMRC’s system.
Below we set out the key MTD factors relating to VAT and Income Tax.
MTD for VAT
All VAT registered businesses must now file their VAT returns using MTD compatible software. This software must digitally link their accounting software to HMRC’s MTD for VAT digital platform. The same also applies to any VAT registered businesses that use Excel to log all their accounting information. In their situation they can use MTD compatible bridging software that would enable their spreadsheets to digitally link to HMRC.
VAT registered businesses can no longer file paper VAT returns or copy and paste their relevant VAT data from an accounts package or Excel spreadsheet into HMRC’s online VAT return portal. Furthermore, the online VAT portal is no longer available and so VAT registered businesses must use the MTD for VAT portal.
The changes brought in as a result of MTD for VAT do not change the statutory VAT return deadlines or payment dates. Businesses that have previously submitted their VAT returns monthly or annually, as opposed to quarterly, can continue to do so under MTD.
MTD for Income Tax and Self Assessment (MTD for ITSA)
MTD for ITSA was initially due to be rolled out from 2023. However, this was moved back to 2024 and has now been delayed again to April 2026.
The original criteria for complying with MTD for ITSA meant that individual taxpayers and those with property income above £10,000 per year would be caught by the scheme.
However, in December 2022, when the Government announced the delayed implementation date, they also changed the criteria, including who must comply and when. MTD for ITSA will now apply as follows:
- From April 2026 – to self-employed people and property landlords who receive a gross annual income of £50,000 or more.
- From April 2027 – to self-employed people and property landlords who receive a gross annual income between £30,000 and £50,000.
For partnerships and those earning less than £30,000 a year, HMRC is reviewing how they will need to comply with the new rules and will make further announcements in due course.
Those who MTD for ITSA will apply will have to keep digital records of their income and expenditure and file this information using MTD compatible software on a quarterly basis to HMRC.
It is thought that the likes of trusts, executors and administrators, non-resident companies and foreign businesses of non-UK domiciled individuals will be exempt from MTD for ITSA.
Changes to Self Assessment filing
At the moment, those filing Self Assessment Income Tax returns file one return per year, with a filing and payment deadline of 31 January, although they can make a payment on account by 31 July.
Under MTD for ITSA, those who are mandated to file digital Income Tax returns will have to do so on a quarterly basis, as well as making a fifth submission, called the end of period statement (EOPS).
The quarterly submissions will consist of stating their income and expenditure for that period, using what is likely to be similar categories as currently used on the self-employed section of the Self Assessment tax return. The EOPS will be used as a ‘mop-up’ return to identify any other income and expenditure which has not been claimed during the year but will also make accounting adjustments for the likes of capital allowances or losses. The EOPS will have to be submitted
by 31 January following the end of the tax year, as per the current rules for Self Assessment filing.
Changes to the accounting year-end
As part of its digitisation plan, HMRC is also making changes to the basis period from which trading income and tax is calculated. These changes will come into effect from April 2024, but the 2023/24 tax year will be a transitional year for relevant businesses to make this change.
Don’t worry, Barkers can guide you through the changes
Whether you are a current or newly formed VAT registered business, or you are concerned about the future changes that are being introduced with MTD for ITSA, do get in touch. We can talk you through the MTD process and how it will affect your circumstances.
We have helped many VAT registered businesses to transition to MTD, with most finding it to be less onerous than they initially thought it would be. Indeed, many have found having up to date business information has been a great help in making business decisions based on the real-time information they can now access about the performance of the business.
We are here to do the same for clients who will need to file their Income Tax Self Assessment returns under MTD from 2026. We therefore urge any clients who will be caught by the new MTD for ITSA rules to start the transition to digital processing and filing of Self Assessment returns now and not wait until April 2026, when the new rules will apply.
We highly recommend using IRIS Kashflow as a MTD compatible software option. We use this software across the practice and can provide training on implementation and ongoing support.
If you would prefer not to get involved with the day-to-day processing of invoices and receipts, we can take on board some if not all of your bookkeeping activities. We can also undertake a bookkeeping healthcheck to review your current processes and to make sure everything is being done accurately, as well as helping you produce relevant management information which could help with decision making and cashflow.
We can do as much or as little as is required to help you make the transition to MTD for VAT or Income Tax as seamless as possible.