Making tax digital

Meeting the digital challenge of the future

HMRC introduced the first phase of its new digital tax initiative, Making Tax Digital (MTD), on 1 April 2019. There are further deadlines scheduled beyond 2020.

At DRS we are committed to helping our clients not only meet their new compliance obligations created by MTD but to making the process of moving across and complying with their obligations a smooth transition with minimal hassle and headache.

What is Making Tax Digital?

HMRC’s Making Tax Digital plans involve getting small businesses and the self-employed to complete digital tax records and returns, with the eventual aim of becoming paperless.

HMRC says that MTD is how they’re delivering on making it “easier for individuals and businesses to get their tax right and keep on top of their affairs.”  Eventually, keeping paper records won’t meet the requirements of tax legislation.  This will place additional compliance obligations on tax payers on a more regular basis than is currently the case.

Making Tax Digital deadlines:

• April 2019: VAT-registered businesses with a taxable turnover above the VAT threshold of £90,000 need to keep digital records and submit digital VAT returns using compatible software. Some ‘more complex’ businesses were given a six-month deferral (read more below)
• 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
• 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: Those with income over £30,000 a year will be mandated from 2027

‘More complex’ businesses include trusts, ‘not for profit’ organisations that are not set up as a company and VAT groups amongst other organisations.

Making Tax Digital for business

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

Making Tax Digital for VAT

VAT-registered businesses with taxable turnover above the VAT registration threshold (£90,000 currently) now need to keep digital records and send digital VAT returns.

If your business has a taxable turnover below the VAT threshold, you can still sign up to Making Tax Digital voluntarily. HMRC encourages this, claiming the software will help you to better understand how your business is performing.

In August 2020, the government announced that businesses below the VAT registration threshold would have to use Making Tax Digital starting in April 2022.  HMRC have specified a list of the digital records you need to keep.

You will need to use compatible software to submit your returns (the software we work with will be compatible). This will pull information from your digital records, which need to be preserved for up to six years.

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.

Making Tax Digital for sole traders

Making Tax Digital for Income Tax was due to launch in 2024 but was delayed to 2026. Due to the new Basis Period Reform, everyone will have a digital start date of 6 April 2026.

Both sole traders with income from one business and landlords who rent out UK property (excluding furnished holiday lettings) will have to sign up.

Again, 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.

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.

Making Tax Digital for Corporation Tax

There’s not much information about when Making Tax Digital will be introduced for Corporation Tax. HMRC have indicated that this will not before 2026.

Making Tax Digital for landlords

Making Tax Digital for Income Tax Self Assessment requires businesses and landlords with qualifying income to maintain digital records and update HMRC each quarter using compatible software. For individuals, MTD for ITSA will be introduced in two phases:

• From Apri 2026, for those with qualifying income over £50,000

• From Apri 2027, for those with qualifying income over £30,000

DRS is already using compatible software and is strongly positioned to help our clients meet their obligations both in the short and longer term.