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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 2024 Phase 3 of MTD will focus on Income Tax and Self Assessment taxpayers, with 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.

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

From April 2024, MTD for Income Tax will apply to unincorporated businesses, self-employed people and landlords. From this date, if their gross income from trading and/or property income exceeds £10,000 during the tax year, they will have to keep digital records of their income and expenditure.

They will also have to provide digital quarterly updates and provide their Self Assessment/Income Tax information to HMRC through MTD compatible software.

However, the new rules do not affect partnerships with individuals as partners until April 2025. Limited Liability Partnerships and corporate partners will have to sign up for MTD for Income Tax at a later date, although HMRC has yet to announce when this will be.

It is also 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 Income Tax.

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 Income Tax, 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 Income Tax returns 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.

As part of its digitisation plan, HMRC is also making changes to the basis period from which trading income and tax is calculated.

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 Income Tax, 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 2024. We therefore urge any clients who will be caught by the new MTD for income Tax rules to start the transition to digital processing and filing of Self Assessment returns now and not wait until April 2024, 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.

Next Step:

Please contact us if you need further advice, have any questions about our services, or would like a free consultation or a fixed quote.

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