Making Tax Digital – what is it? and when does it start?

Making Tax Digital (MTD) is set to bring about the biggest change to the UK’s tax system for a generation .

MTD is the government’s plan to upgrade the UK’s tax system and make it fit for the digital age. This means that online tax submissions will become the norm and the annual tax return as we know it will become a thing of the past .

The main requirements of MTD for Income Tax is the necessity to keep a digital record of income and expenses. This can still be via a spreadsheet, as long as the data is imported digitally into the software used to send a summary of income and expenses to HMRC. 

 A summary of income and expenses must be sent to HMRC every three months.  Using the information that has been sent, HMRC can then provide an estimate of the tax liability 

A final report needs to be sent to HMRC which confirms the income and expenses of the accounting year. 

So the biggest change will be the requirement to report your business’s financial information to HMRC at least four times a year. 

Making Tax Digital deadlines

HMRC is introducing Making Tax Digital gradually:

• April 2021: 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 (read more below)
• October 2021: 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 2023: MTD will apply to taxpayers who file Income Tax Self Assessments for business or property income of more than £10,000 a year
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Making Tax Digital for sole traders

Making Tax Digital for Income Tax will launch properly in April 2023 for self-employed people and landlords who make over £10,000 annually. So while it's not compulsory (yet), if you fill in a Self Assessment tax return, you can sign up for a digital tax returns pilot scheme.The pilot lets you keep records digitally and send Income Tax updates to HMRC instead of filing a Self Assessment tax return. The government estimates that so far, around 30 per cent of businesses and landlords have signed up voluntarily.HMRC says it will lead to a more real-time system, which lets you see how much Income Tax you owe as you go. Signing up will also give you time to get used to the process before the 2023 deadline.Both sole traders with income from one business and landlords who rent out UK property (excluding furnished holiday lettings) can sign up.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 

What do I need to do to prepare for MTD?

If MTD applies to you, you’ll have to use digital tools to keep records of your income and costs. If you use spreadsheets to manage your accounts at the moment and don’t want to switch to accounting software, you’ll also have to make sure that they meet MTD’s technical requirements. This will most likely involve combining your spreadsheets with software in some way.