Tax Digital breakdown

The Making Tax Digital breakdown: What you need to know


To assist you to better understand the Making Tax Digital (MTD) programme from the UK government, we’ve put together this comprehensive guide. Read on to see how it can affect your business.

Why did the UK government start the Making Tax Digital initiative?

As computers have become an essential part of daily life, so have they begun to impact the business world. All kinds of records and ways of doing business have become increasingly digital. The government took note of this and realised that digital tax returns are much more likely to be correctly filled out and not suffer from the errors due to incorrect arithmetic or an incorrectly filled out field. 

In fact, this brought about a new goal to make Her Majesties Revenues and Customs (HMRC) one of the most modern tax organisations in the entire world. Making Tax Digital is one of the ways they plan to accomplish this. However, the only way this can work effectively is to ensure that businesses and the tax authority work together in a seamless digital fashion.

The initial date for MTD was in 2019. At this time, VAT-registered enterprises with a yearly turnover of more above £85,000 could begin the process of registering for the MTD initiative. Just a brief time later, by 9 March 2020, there were more than 1.4 million businesses who had filed over four million VAT returns through MTD-acceptable software.

Registration for MTD will begin in April 2022 for businesses that fall below the current threshold. At this time, all businesses are now encouraged to sign up for MTD, even if they do not meet the annual turnover levels. The reason for this is the strong belief from the VAT authorities that a company will be more financially healthy by keeping digital records and submitting online tax returns. notwithstanding the current VAT level. A company’s financial health can be better understood if digital records and tax returns are retained and filed. 

Making Tax Digital for VAT returns

In order to file a VAT return online, businesses must use MTD-compliant software. Some organizations still opt and prefer to use Excel spreadsheets to keep track of and store their VAT and returns data. To accommodate for this, MTD employs a method known as bridging software to interface digitally with spreadsheet records. 

To submit your VAT return, you will need the following information: 

  • Business name and contact information
  • VAT number
  • Details of any schemes used

It’s also essential to keep track of any VAT payments or adjustments that need to be made to returns. You must maintain track of the time of supply (tax point), the VAT rate, and the reversal of charge transactions.

Making Tax Digital for the Self Employed

At the current time, MTD-compliant software must be used by sole proprietors (sole traders) and property owners who earn more than £10,000 per year to file their tax returns. MTD for Income Tax requires businesses to file quarterly filings rather than just make one at the end of the relevant fiscal year. It’s unlikely and unnecessary that the income and expense overview will require any accounting adjustments. Once they have filed a quarterly return, they will be able to get a view of their current tax status. It’s important to note that you will only claim any deductions or exemptions after submitting the final tax return for the year. Effectively this should be the fourth return of your fiscal year. 

MTD for Income Tax hasn’t had a large-scale roll out to the same level as MTD for VAT as that is where the focus has been. However, you have been able to sign up if you qualify since March 2018. There is no news as to when this programme will become mandatory on a larger scale. 

Current Making Tax Digital timelines

These are the timelines as currently outlined by the UK government. They are likely subject to change, but still give an indication of the coming deadlines in relation to MTD. All VAT-registered businesses must complete the MTD registration and compliance process by April 2022. All self-employed business owners (sole traders) and property owners making more than £10,000 per year must register for MTD by April 2024, as stipulated by legislation. General partnerships with a gross annual revenue of less than £100,000 will be allowed beginning in April 2025. At the earliest, MTD for Corporation Tax will go into effect in April 2026. 

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