(This article was last updated on 02 December 2024.)
Over the last few years, HMRC has rolled out a new scheme known as Making Tax Digital (MTD), which applies to a growing number of taxpayers (businesses and individuals) across the nation.
Although we’re currently in the second stage of MTD, the government has recently announced further changes to the scheme and how qualifying individuals must now handle their Income Tax Self Assessment (ITSA).
The latest stage of Making Tax Digital was rolled out in April 2024. In this article, we not only take an in-depth look at what Making Tax Digital (MTD) is all about but also help you discover how the upcoming changes to MTD will affect how you do business.
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What does MTD Mean?
Making Tax Digital (or MTD, for short) is a critical component of the government's Tax Administration Strategy. It requires both companies and qualifying individuals to:
Maintain digital records
Utilise Making Tax Digital compatible software
Submit quarterly updates, which will help the tax system get closer to real-time
MTD for VAT is a component of a larger government effort to streamline the taxation system so that taxpayers can pay their taxes more accurately.
Ultimately, the government aims to reduce the amount of tax lost due to avoidable errors from manual data entry.
Using accounting software that links to HMRC
MTD for VAT primarily means that in order to submit a VAT Return, you must use accounting software that can link to HMRC's systems, or use a digital accounting process that can do so.
When MTD was first introduced in 2019, businesses that were VAT-registered and had taxable revenues above the VAT registration threshold of £85k were required to maintain records electronically and submit their VAT returns using MTD-compliant software.
As we mentioned earlier, however, the Making Tax Digital rules have since changed to apply to a broader range of businesses and qualifying individuals.
What are the Benefits of Making Tax Digital?
Aside from streamlining the tax process and reducing lost tax due to human errors, MTD offers several other benefits to businesses.
The benefits of Making Tax Digital include:
The new system is designed to be more efficient, with an increased focus on automation.
Saves time and money by reducing the need for paper-based processes.
Encourages digitalisation to add to broader productivity gains for businesses.
You will be able to access your accounts online, meaning you can view them at any time of day or night.
HMRC will have more information about your business than ever before, making it easier to identify errors and fraud.
Customers can use software to combine tax management with a variety of business processes.
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MTD VAT Requirements at a Glance
With a third phase of MTD having been swept out in 2024, it’s important to familiarise yourself with how these changes may affect the way you handle your tax duties.
Here’s a quick look at the MTD VAT requirements and how they have changed since Making Tax Digital’s debut in 2019.
Making Tax Digital First Phase
From the 1st of April 2019, businesses with a taxable turnover of more than £85,000 were required to maintain their accounting records digitally in accounting software or spreadsheets.
In addition, they had to submit their VAT returns to HMRC using MTD-compliant software via a digital link.
There were still no requirements to digitalise the source documents, however, including things such as the receipt or supplier invoice.
Making Tax Digital Second Phase
The second phase of Making Tax Digital requires all VAT-registered companies, regardless of turnover, to register for MTD.
Businesses are no longer able to submit monthly or quarterly VAT returns using their current VAT online account as of 1 November 2022.
To maintain your VAT records and submit VAT returns, you must instead utilise MTD-compatible software.
This contributes to HMRC's ultimate goal of moving to an entirely paperless tax filing system.
Making Tax Digital Recent Updates
Recently, HMRC has made even more updates to their Making Tax Digital scheme.
The government is extending the Making Tax Digital (MTD) mandate to the 4.2 million taxpayers, including property owners, sole traders, and partnerships, who have business and/or property income over £10,000.
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Businesses, self-employed people, and landlords who need to pay income tax must comply with these adjustments.
Known as Making Tax Digital for Income Tax Self Assessment (or MTD for ITSA for short), this next phase was rolled out in April 2023.
However, the government is aware of the difficulties many UK companies have encountered as the nation has recovered from the pandemic over the past year.
Due to this and input from stakeholders, they introduced MTD ITSA one year later, in April 2024.
What Digital Records Must Be Kept for MTD?
As you know, keeping digital records and sending digital VAT returns are requirements for all VAT-registered companies.
So, which digital records should you be paying close attention to during this process?
Your MTD digital records must include:
Name and contact details of your business
VAT number and information about any relevant schemes
VAT on goods received or made
Modifications to returns
Time of supply (tax point)
Rate of VAT imposed on goods made
Reverse charge transactions (which must be recorded twice, as a supply made and a supply received, if your software doesn't document them)
DGT (daily gross takings) if your business uses a retail scheme
Purchases of assets that, if you use the Flat Rate Scheme, you can claim tax on
Total output tax and the amount of sales earned on Gold Accounting Scheme transactions (if applicable)
Documents pertaining to numerous purchases made or received for your company (i.e. by volunteers, third-party businesses, or employees)
Need Additional MTD for VAT Assistance?
The new changes to Making Tax Digital can take some time to get used to, however, both businesses and individuals must keep on top of these updates to ensure they are HMRC compliant.
If you need additional help in understanding MTD, the HMRC has several helpful resources, including email updates, videos, and webinars that you can check out.
