What does MTD stand for?
Let’s get the acronym out of the way first. MTD stands for Making Tax Digital.
What is Making Tax Digital?
MTD is a government initiative, led by HMRC. As the name suggests, Making Tax Digital is all about moving to a system of digital tax records and returns. When MTD is fully implemented, businesses and the self-employed will have to use approved software for keeping their financial records and submitting their tax returns. In other words, the tax system will become paperless.
Why is MTD being introduced?
HMRC says that MTD is being introduced “to make it easier for individuals and businesses to get their tax right and keep on top of their affairs”.
The more cynical amongst us would see that this is likely the precursor for a system that collects more tax from us earlier (quarterly) rather than 9 months after the end of each tax year.
However, it’s highly likely that HMRC will claim that MTD as a more transparent system that will help to reduce tax reporting errors and fraud. Certainly, HMRC is keen to gain access to more of our financial data – if implemented, proposals from the Office of Tax Simplification could soon give the taxman access to our bank, pensions and other financial data.
Which taxes does MTD apply to?
Making Tax Digital currently applies to VAT. In the near future it will also cover Income Tax and Corporation Tax. Scroll down to learn more about MTD and each of these taxes.
Is MTD compulsory?
Currently, MTD for VAT is compulsory for all VAT registered businesses. However, you can apply for an exemption if it's not reasonable or practical for you to use a computer. This may be because of your age, a disability, the remoteness of your location or your religious beliefs. You can currently apply for an exemption from MTD for VAT by visiting this page.
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When does Making Tax Digital start?
Making Tax Digital for VAT has already begun. MTD for Income Tax Self Assessment (MTD ITSA) and MTD for Corporation Tax are both in the pipeline. These are the start dates for each type of Making Tax Digital.
April 2022
MTD for VAT
VAT-registered businesses with an annual taxable turnover of £85,000 or more needed to comply with this scheme by April 2021. All VAT-registered businesses must take part in MTD from April 2022.
April 2026
MTD for Income Tax Self Assessment
You can join a pilot scheme now if you are a sole trader with income from one business, a landlord who rents out property, or both. Self-employed people and landlords with income of £50,000+ will be required to be part of the scheme by April 2026, while those with an income of £30,000 will need to join by April 2027.
April 2026
MTD for Corporation Tax
A pilot scheme is expected to start in April 2024. MTD for Corporation Tax should become compulsory in April 2026.
MTD for VAT explained
To comply with MTD for VAT, from April 2022 you must keep all of your VAT records digitally using MTD-compliant software like FreeAgent or Xero.
You must also submit your VAT returns to HMRC online rather than complete and send in manual returns by post as in the past. If you don’t, you face a £400 penalty for each wrongly submitted return.
At THP, we have helped hundreds of clients make a smooth transition to MTD for VAT. You can learn more about our Making Tax Digital for VAT service here.
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MTD for Income Tax (MTD ITSA)
Making Tax Digital for Income Tax Self Assessment goes live for self-employed people and landlords with an income of £50,000+ in April 2026. Those with incomes of £30,000+ need to join by April 2027.
As with MTD for VAT, you will need to use approved software to submit your Self Assessment Tax Returns. However, instead of making an annual tax return, you will need to make quarterly submissions. These will due on the fifth day of August, November, February and May. This means the first main tranche of taxpayers will make their first submission on 5th August 2026.
As well as submitting quarterly returns, you’ll need to submit an End of Period Statement by 31st January each year. This lets you make adjustments, such as to capital allowances and losses. You can also declare other income and capital gains via a Finalisation Statement, which is due on the same date.
Although you will have to make quarterly Self Assessment Returns via your software, you will still pay your Income Tax on the same dates – the main bill by 31st January and your payment on account by 31st July.
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MTD for Corporation Tax
Making Tax Digital for Corporation Tax will be the last plank of MTD to be put in place. There will be a pilot scheme in 2024 and it will become mandatory in April 2026.
HMRC launched a consultation on MTD for Corporation Tax, which closed in March 2021. The key changes it proposed were for businesses to:
- Maintain digital records of income and expenditure
- Provide HMRC with quarterly summary updates using MTD compatible software
- Making an annual Corporation Tax return using compatible software.
We will update this section as more information is released about the scheme.
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MTD for landlords
As the Accountants for Landlords, we’ve recently put together a Landlord Platinum Service for MTD. After reviewing all the main cloud accounting platforms for Landlords, we have concluded that the best MTD-compliant software for managing a buy-to-let portfolio is Hammock. That’s why we’ve teamed up with Hammock to offer our landlord clients use of this powerful software free of charge. In addition, we’ve bundled together a range of other services that are designed to help Landlords remain MTD compliant, maximise profits, lower tax bills and manage their Buy-to-Let portfolios more efficiently. Click on the button below to find out more and to obtain an instant tailored quote for our Platinum service.
Learn about our Platinum Service for Landlords
Making Tax Digital for sole traders
In addition to our Platinum service for Landlords, we also give our sole trader clients a helping hand with Making Tax Digital by offering them the popular FreeAgent cloud accounting software at no extra cost. If you are a business owner/sole trader, this means you will have access to expert advice from our team of accountants to help you maintain your records correctly and keep your tax bill lower. You also gain free access to simple-to-use and intuitive MTD compliant software that makes managing your business finances a doddle – saving you at least £227 per year. Click below to learn more.
Get FreeAgent at no extra costIf you are VAT registered you should already have signed up for MTD for VAT. The deadline was April 2022 (apart from a few exceptions).
- You will need to sign up for MTD for Self Assessment Income Tax by April 2026 if you have income of £50,000+ and by April 2027 if you have income of £30,000. However, some people are able to sign up for a pilot scheme now.
You can do this if you are:
- A UK resident
- Registered for Self Assessment and your payments are up to date
- A sole trader with income from one business, or a landlord who rents out UK property (or both)
- Sign up for the MTD ITSA pilot
Currently, you cannot sign up for MTD for Corporation Tax. We will update this section when the Making Tax Digital for Corporation Tax pilot goes live (currently expected in 2024).
Generally, ‘yes’. The simplest method is to choose a MTD-approved software package. Currently there are a number of software platforms available that are fully compliant with MTD for VAT. We recommend Xero or FreeAgent, depending on your business’s size and needs. Scroll down to learn how THP clients can obtain full use of FreeAgent at no extra cost.
Because MTD for Income Tax is only now starting to be phased in, at this time there are only a relatively small number of MTD compliant software packages available. The Gov.uk website maintains a list of available software here, which is expected to grow rapidly.
In due course, software will be released that’s compliant with MTD for Corporation Tax.
There are methods of making software such as spreadsheets compliant with MTD. These rely on creating ‘digital links’ that create an unbroken digital chain as data is moved from one application to another. Following the introduction of mandatory MTD, we no longer recommend the continued use of spreadsheets for accounting or bookkeeping as there are now far more effective software solutions available.
At THP, we’ve chalked up a huge amount of experience helping clients to comply with MTD for VAT. This has included helping them to migrate to MTD-compliant software packages as well as ensuring their VAT returns are submitted accurately and on time.
We are now working with self-employed people and landlords who need to prepare for MTD for Income Tax Self Assessment. If you would like advice or help with planning for this, please click here to book a call with one of our MTD experts.
Ask us about MTD for Vat, Income Tax or Corporation Tax.
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More about Making Tax Digital
Want to learn more about Making Tax Digital? If so, please browse our blog updates about MTD.
Making Tax Digital: Digital link requirements
MTD for VAT penalties and reporting requirements
7 days to get your business MTD compliant
