Making Tax Digital

The first stage of Making Tax Digital (MTD), - MTD for VAT, is now law for the majority of VAT registered businesses above the VAT threshold. This came into force in April 2019. Looking ahead, there are four more MTD milestones in sight for businesses and individuals alike, with the upcoming digital links deadline this year, the deadline for all remaining VAT registered businesses in 2022, income tax in 2024 and lastly corporation tax in 2024 at the earliest.. 

MTD is the most fundamental change to the administration of the tax system for two decades. The changes are so fundamental it’s important to understand what's involved and what it means for your business and personal tax reporting.

What is MTD?

MTD is a key part of the Government’s plans to make it easier for individuals and businesses to get their tax right and keep on top of their affairs through a fully digital tax system.

The initial roll-out of MTD has already started. Every small business owner and individual taxpayer now has an HMRC digital account that they can access to check their records and manage their information.

First stage - MTD for VAT

MTD for VAT  was the first stage of the roll out and was mandatory from April 2019  for the majority of VAT registered businesses above the VAT threshold. 

The first stage of MTD was mandatory for the following businesses

• VAT registered businesses (with turnover above the VAT threshold £85k).
• Other taxes will come under the scope of MTD for these businesses after April 2022.

Second stage – MTD for VAT

The second stage of MTD for VAT will be mandated from 1 April 2022 for all remaining VAT registered businesses not operating under the current legislation.

From the first VAT period starting on or after 1 April 2022, you will have to:

• Sign-up to MTD
• Keep your records digitally (for VAT purposes only)
• Submit your VAT return information to HMRC through MTD compatible software

If your business has already been granted an exemption to MTD, this will still apply beyond 1 April 2022. If you have not already applied for an exemption and think you may be eligible, you may still be able to apply, although the conditions are narrow. Guidance on how to apply for an exemption can be found here.

How will MTD help me manage my tax and my reporting?

It’s hoped MTD records will offer many benefits by helping businesses manage their taxes more effectively through:

• Providing a complete picture of your business – through your digital account you will be able to see an overview of your tax affairs and manage liabilities at the same time.
• Near real-time reporting – HMRC aim to collect and process tax information in as near to real-time as possible.
• Knowing your tax liability – no longer will you need to wait till the end of the tax year to know how much tax you are due to pay.

Who is exempt from MTD?

MTD will apply to a range of taxpayers over time, including most businesses, self-employed people, landlords and individual taxpayers, but there are a few exceptions, namely:

• Those who cannot engage digitally for religious reasons or due to a factor such as age, disability or location (for example no availability of broadband). These exemptions are the same as the current exemptions for VAT online filing.
• VAT registered businesses with turnover of less than the VAT threshold will initially be exempt from MTD VAT reporting but this exemption will be removed from April 2022.
• When MTD for income tax becomes mandatory there will be an exemption for businesses and landlords with a very small turnover; the suggested level of this exemption is £10,000, but this is still to be confirmed.

Which software is compliant?

HMRC has issued a list of software providers that can or will offer either MTD compatible systems or API software.

Compliant software should be able to record and preserve digital records and send and receive VAT return information to HMRC digitally via a special link. There are various off-the-shelf software packages available, some which will include the capability to submit returns via a digital link. Where this capability is not available, bridging software can be purchased to enable you to link digitally to HMRC’s systems.

What do I need to do?

If you are a VAT registered business with turnover above the VAT threshold (£85,000) you should by now be signed up for MTD for VAT and be submitting your VAT reports digitally to HMRC. The next step is to ensure all your systems that provide financial information for VAT reporting are linked up digitally, thereby removing any need for manual input at any stage. More information on digital links and the steps you need to take is detailed in our latest blog - Making Tax Digital - an opportunity to extend the digital links deadline.

Your MTD timeline

Got a question?

We can help you review your system and suggest the best process for you and your business. Find out more about our digital solutions and arrange a free consultation with one of our advisers.