Making Tax Digital (MTD)

What is MTD?

Making Tax Digital 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. HMRC’s aim under MTD is to join up their internal systems and create one account for each taxpayer for all their different taxes.

Via this new digital account, taxpayers will be able to view all their payments and offset overpayments in one tax account against underpayments in others.

MTD imposes new quarterly filing, and potentially payment (to be confirmed), obligations for businesses and landlords. A new late filing and payment penalty system will eventually apply to quarterly returns and annual declarations.

Timetable:

Phase 1: VAT

  • Most VAT registered businesses with turnover exceeding the VAT registration threshold are already reporting under MTD and must submit their VAT returns to HMRC using ‘functional compatible software’, with ‘digital links’ between software programs, applications or products.
  • April 2022 – All VAT registered businesses must retain digital records and submit their VAT returns to HMRC using ‘functional compatible software’, unless an exemption such as digital exclusion applies. This includes those below the VAT registration threshold. 

Phase 2: Income Tax

  • April 2023, self-employed businesses and landlords with business turnover above £10,000 will report under MTD for Income Tax.
  • The £10,000 threshold includes income from all sources of self-employed trade or property income.
  • Information must be submitted to HMRC on a quarterly basis but can be done more frequently if you wish. An end of period statement will also have to be submitted, meaning a minimum of 6 returns per year.
  • Under MTD a separate return must be submitted for each trade, for example if you are a partner in a business, have a rental property, and income from another self-employed source, you would have to submit 3 separate quarterly returns for each of these income streams.
  • Tax will still be payable on the current payment dates of January and July.

Phase 3: Corporation Tax

  • April 2024 companies can start using an MTD for Corporation Tax (CT) pilot scheme.
  • April 2026 companies join MTD for CT.
  • The extension of MTD to corporation tax will mean a fundamental shake up of record keeping and filing requirements for companies. In summary, under MTD companies will need to:
    • maintain digital records of their income and expenditure;
    • provide quarterly updates of income and expenditure to HMRC using MTD compatible software; and
    • file their annual CT return using MTD compatible software.

Changes from Current System:

A year-end declaration will be filed instead of a Self-Assessment (SA) return or Corporation Tax (CT) return. Businesses will still need to prepare year-end accounts to reconcile their quarterly payments, claim reliefs and make accounting adjustments

The key difference from the old tax return appears to be that HMRC will pre-populate some of the return figures e.g. bank interest, income from employment, pensions, etc. with the information submitted in the quarterly returns.

It will be the taxpayers responsibility to ensure that the pre-populated data from HMRC is correct.

Businesses that do not use smartphones, software or computers may be obliged to do so but a free software will be available. MTD is likely to be expensive for many micro and small businesses. Some two million businesses are not represented by agents and they will have to learn the new systems.

Some exemptions will be available: some nano businesses (turnover below £10k) will be exempt from the new MTD for Income Tax regime.

Published
7th July 2021