What is Making Tax Digital? An update for small businesses

• What is Making Tax Digital?
• Making Tax Digital delayed until 2026
• What is Making Tax Digital for VAT?
• Making Tax Digital deadlines
• How to register for Making Tax Digital
• Making Tax Digital software

What is Making Tax Digital?

Making Tax Digital (MTD) is a government initiative to get small businesses and the self-employed to complete digital tax records and returns.

The government says that MTD aims “to help businesses get their tax right first time by reducing errors, making it easier for them to manage their tax affairs by going digital, and consequently helping them to grow.”

HMRC already introduced the personal tax account in 2015, which is a digital tax account that aims to make it easier for people to manage their tax affairs.

Then came the first phase of MTD in 2019 – Making Tax Digital for VAT. This involves keeping digital records and using accounting software to complete VAT tax returns.

Eventually, keeping paper records won’t meet the requirements of tax legislation.

Making Tax Digital delayed until 2026

The digital tax system has been delayed for the self-employed and landlords until 2026, according to a government announcement on 19 December 2022.

Self Assessment tax payers were due to use Making Tax Digital for income tax from April 2024. The phased approach is now coming in from April 2026.

Initially this will only apply to the self-employed with annual incomes from £50,000. Those with incomes of £30,000 or more will be required to use Making Tax Digital for the 2027-28 tax year.

What is Making Tax Digital for VAT?

HMRC has been introducing Making Tax Digital gradually. And here’s an overview of key dates you need to be aware of.

Making Tax Digital for VAT started from 1 April 2019, affecting VAT-registered businesses with a taxable turnover above the VAT threshold of £85,000.

Then from 1 April 2022, Making Tax Digital came in for all VAT-registered businesses. However, as businesses file their VAT returns at different times depending on their accounting period, the timeline for signing up to MTD hasn’t been clear cut. This meant many businesses continued to use paper records during this cross-over period.

The final phase came in on 1 November 2022, so now all VAT-registered businesses are required to use MTD compatible software and keep records with a MTD account. You’ll no longer be able to file paper returns or use your old VAT online account.

Making Tax Digital deadlines

• April 2019: VAT-registered businesses with a taxable turnover above the VAT threshold of £85,000 need to keep digital records and submit digital VAT returns using compatible software. Some ‘more complex’ businesses were given a six-month deferral
• October 2019: more complex businesses who were deferred need to comply with Making Tax Digital
• April 2022: MTD will be compulsory for businesses with a turnover below the £85,000 VAT threshold
• November 2022: All VAT-registered businesses must sign up to MTD and use compatible software to file returns
• April 2026: MTD will apply to taxpayers who file income tax Self Assessments for business or property income of more than £50,000 a year
• April 2027: Self-employed people and landlords with an income of between £30,000 and £50,000 who self-assess income tax will need to comply with MTD

More complex businesses

‘More complex’ businesses needed to comply with MTD from October 2019. These include trusts, ‘not for profit’ organisations that are not set up as a company, VAT divisions, VAT groups, those public sector entities required to provide additional information on their VAT return (such as government departments and NHS Trusts), local authorities, public corporations, traders based overseas, those required to make payments on account and annual accounting scheme users.

How to register for Making Tax Digital

At the moment Making Tax Digital only affects VAT-registered businesses – but eventually, all businesses will have to comply.

Here’s how to set up a Making Tax Digital for your business, making sure you’re complying with the right phases.

Making Tax Digital for VAT

All VAT-registered businesses need to keep digital records and send digital VAT returns.

Your first step is to start using compatible software to submit your returns. This pulls information from your digital records, which need to be preserved for up to six years.

Then you’ll need to sign up for Making Tax Digital using the government’s tax service.

Digital records you need to keep include:

• business name and contact details
• VAT number and details of any schemes used
• VAT on supplies made and received
• adjustments to returns
• time of supply (tax point)
• rate of VAT charged on supplies made
• reverse charge transactions (if your software doesn’t record them, you need to record them twice as a supply made and a supply received)
• daily gross takings (DGT) if you use a retail scheme
• purchases of assets you can reclaim tax on if you use the Flat Rate Scheme
• value of sales made and total output tax on Gold Accounting Scheme purchases (if applicable)
• documents covering multiple supplies made or received on behalf of your business (by volunteers, third party businesses or employees)

You can use spreadsheets to calculate or summarise VAT transactions and work out what information you need to send to HMRC. But ultimately you’ll need to use compatible software to send that information. You might also need what HMRC calls ‘bridging software’, which converts your records to the right format before you submit.

How to sign up for Making Tax Digital for VAT

Making Tax Digital for income tax

Making Tax Digital for income tax will be phased in from April 2026 for self-employed people and landlords – three years later than planned. It’s been subject to several delays over the years, initially because HMRC said it wanted to give business owners more time to prepare after the pandemic.

The first phase is for those who make over £50,000 annually. This annual income threshold is higher than the £10,000 a year initially proposed.

Meanwhile, if you have an income of between £30,000 and £50,000 you’ll need to use MTD by April 2027.

The government confirmed in the Autumn Statement 2023 that smaller businesses with an annual income below £30,000 won’t be required to use the scheme.

How will it work?

Making Tax Digital lets you keep records digitally and send income tax updates to HMRC instead of filing a Self Assessment tax return.

The biggest change for self-assessed income tax payers will be quarterly reporting through Making Tax Digital. As well as keeping digital records, businesses will need to report income and expenditure to HMRC through the MTD software every three months.

HMRC says it will lead to a more real-time system, which lets you see how much income tax you owe as you go.

At the end of the accounting year, you’ll send a final report and your tax for the year will be calculated. This is the point at which you’ll claim any allowances and reliefs.

This will replace the Self Assessment tax return with an end of period statement and final declaration.

Businesses encouraged to sign up early

While it’s not compulsory (yet), if you fill in a Self Assessment tax return, you may be able to sign up for MTD for income tax early.

Signing up will also give you time to get used to the process before the 2026 deadline.

Both sole traders and landlords who rent out UK property can sign up (unless you’re operating as a limited company or partnership). You’ll need to use compatible software to keep records and send an income and expenses summary to HMRC every three months. You’ll be able to see estimates of how much tax you’ll owe.

What about Making Tax Digital for partnerships?

There isn’t yet a date for when general partnerships need to sign up to Making Tax Digital for income tax. This had originally been planned for 2025, but has now been put on hold.

Making Tax Digital for corporation tax

The government ran a consultation on Making Tax Digital for corporation tax, which closed in March 2021. There hasn’t yet been any further details of how and when MTD might be introduced for corporation tax.

Making Tax Digital for landlords

If you make more than £50,000 a year from your rental properties and pay tax through Self Assessment, you’ll need to sign up for Making Tax Digital by April 2026.

And a deadline of April 2027 will apply if you’re annual income is between £30,000 and £50,000.

At the moment, you can join the scheme voluntarily, should you wish to.

Making Tax Digital software

Businesses will need to use compatible MTD software to send digital tax returns. Your digital records don’t all have to be on one piece of software, but HMRC says that you “must have links between the software you use by your first VAT period after 1 April 2021.”

Some of the ways you can link software includes by emailing records, linking cells in spreadsheets and downloading and uploading files.

We have a guide to the best accounting software for small business.

The product you use to submit digital tax returns needs to be compatible with the tax authority. HMRC has a list of compatible software – examples include Xero, Quickbooks, and Zoho.

Businesses that don’t already use accounting software are likely to face one-off and ongoing costs. There are also likely to be costs when training staff to use the software and comply with Making Tax Digital.

While the government has estimated costs of £70 a year over four years for small businesses implementing Making Tax Digital, the Institute of Chartered Accountants in England and Wales puts it at £1,250. Read about how much Making Tax Digital is costing businesses.

More tax guides for the self-employed

• The self-employed guide to Self Assessment tax returns
• What can I claim on tax? A guide to self-employed expenses
• Self Assessment and tax resources for the self-employed
• Is public liability insurance tax deductible?

Have you started using Making Tax Digital? Let us know how you’re getting on in the comments below.