Making Tax Digital (MTD) is moving along at pace, taking effect for income tax for many from April 2024. What else is on the horizon, and how can you get ready?
What is MTD?
MTD is the Government’s flagship initiative to modernise the UK tax system to prevent confusion about the tax regime and recoup billions of pounds in lost taxation owing to mistakes.
There are three main steps to MTD: VAT, income tax self-assessment (ITSA) and corporation tax.
The aim is to create digital tax accounts that can be accessed online – similar to how an online banking works – to house data that will be used to work out an individual’s or business’s tax liability, instead of the traditional tax return.
MTD started with MTD for VAT in April 2019, when every VAT-registered business above the statutory registration threshold of £85,000 turnover per year had to sign up to the scheme.
In April 2022, MTD for VAT was expanded to include every business registered for VAT, regardless of their turnover.
Next up is MTD ITSA. It was originally meant to be introduced in April 2023, but the Government pushed back the rollout by 12 months to give businesses more time to prepare for the changes and recover from the pandemic.
That doesn’t mean you shouldn’t get ready now, though, as those businesses who fully understand their new obligations will have an edge over their competitors.
Who will MTD ITSA affect?
MTD ITSA will affect most self-employed taxpayers with business or property income above £10,000 a year. General partnerships are to be excluded, for now.
Under the scheme, all unincorporated businesses will be required to file quarterly returns on or before 5 August, 5 November, 5 February and 5 May every year.
Quarterly returns are thought to be very similar to the current format of a regular self-assessment tax return, consisting of total sales and expenses that arise every three months.
You will also have to file an end-of-period statement on or before 31 January following the end of the relevant tax year, every year.
From 6 April 2025, most unincorporated business partnerships that have business or property income and only individuals as partners will also have to abide by MTD ITSA rules.
When all other partnerships, including corporate partners and limited liability partnerships, will have to join the scheme is yet to be determined.
To stay compliant with MTD, you will have to keep digital records by using MTD-compatible software, such as Sage, Xero or Quickbooks.
Alternatively, you can use regular spreadsheets to keep records, as long as they use special bridging software that links to HMRC’s systems.
There’s a lot more to accounting software than MTD, as they can help you streamline your workplaces, collect your financial data and much more.
Talk to us to get more information about which cloud accounting software might work best for you.
What else you need to know about MTD
After MTD ITSA will be MTD for corporation tax, which HMRC says won’t arrive until April 2026 at the earliest.
It proposed April 2024 as the month when a voluntary pilot scheme will be released for MTD for corporation tax.
A pilot scheme is currently running for MTD ITSA, which gives businesses the perfect chance to get used to the processes that will one day become compulsory for every UK business.
Talk to us about MTD.