What is Making Tax Digital?

Team Nomi

Aug 27, 2024
9 minutes read

Making Tax Digital (MTD) is a UK government initiative aimed at transforming the way businesses manage their tax obligations. The primary goal of MTD is to make the tax process easy by requiring businesses to maintain digital records and submit their tax returns using compatible software. This shift enhances accuracy and efficiency and minimises the risk of errors that can occur with manual record-keeping.

Under MTD, businesses must use digital tools to track their income and expenses, making it easier to comply with tax regulations. This initiative is particularly significant for VAT-registered businesses, which are already required to follow MTD guidelines.

As MTD expands to include income tax and other areas, understanding its implications becomes essential for all taxpayers. By embracing digital solutions, businesses can streamline their operations and ensure they meet their tax obligations more quickly and confidently.

What is Making Tax Digital?

Making Tax Digital (MTD) is a government initiative in the UK designed to modernise the tax system by encouraging businesses and individuals to keep their tax records digitally. Launched in 2019, MTD aims to make tax reporting more efficient and accurate, reducing the likelihood of errors that can arise from manual record-keeping.

Under MTD, businesses are required to use approved software to maintain digital records of their income and expenses. This means taxpayers can easily track their financial activities in real time instead of filling out paper forms or spreadsheets, making preparing and submitting tax returns simpler.

MTD initially focused on Value Added Tax (VAT) but is set to expand to other tax areas, including income tax. By embracing digital tools, taxpayers can streamline their processes, stay compliant with regulations, and save time and resources.

Benefits of Making Tax Digital

Making Tax Digital offers several advantages for businesses and individuals alike. Here are five key benefits of embracing this initiative:

1. Improved accuracy: Using digital tools to record and submit tax information significantly reduces the risk of errors. This helps ensure that businesses pay the correct amount of tax and avoid costly penalties.
2. Time savings: MTD streamlines the tax process, saving businesses valuable time that would otherwise be spent on manual record-keeping and form-filling. This allows them to focus on their core operations and growth.
3. Enhanced organisation: With digital records, businesses can easily access and organise their financial information, making it simpler to track income, expenses, and tax obligations. This improved organisation can lead to better decision-making and financial planning.
4. Reduced administrative burden: MTD eliminates the need for businesses to submit paper-based tax returns, reducing the administrative burden and freeing up resources for other important tasks.
5. Improved cash flow: By staying on top of their tax obligations through regular digital updates, businesses can better manage their cash flow and avoid unexpected tax bills.

Overall, the benefits of Making Taxes Digital extend beyond just compliance. By embracing digital solutions, businesses can improve their efficiency, accuracy, and financial management, ultimately leading to greater success and growth.

Making Tax Digital for VAT

Making Tax Digital (MTD) for VAT is a significant change in how VAT-registered businesses in the UK manage their tax obligations. Introduced in April 2019, MTD for VAT requires businesses with a taxable turnover above the VAT threshold to keep digital records and submit their VAT returns through compatible software. This initiative aims to improve efficiency, reduce errors, and simplify the tax process for businesses.

Key features of MTD for VAT include:

• Digital Record-Keeping: Businesses must maintain digital records of their sales and purchases. This means using accounting software to store and organise financial data electronically rather than relying on paper records or spreadsheets.
• Submission of VAT Returns: VAT returns must be submitted through MTD-compatible software. This software automatically pulls data from the digital records, ensuring the information submitted is accurate and up-to-date. Businesses can no longer submit VAT returns manually through the HMRC website.
• Compliance and Deadlines: Businesses must comply with MTD regulations by keeping their records digitally and submitting returns on time. Failure to comply can result in penalties, so businesses must understand their responsibilities under this new system.

MTD for VAT streamlines the tax process and helps businesses gain better insights into their financial performance. By utilising digital tools, companies can easily track their VAT obligations, manage cash flow, and make informed decisions based on real-time data. Additionally, this initiative encourages businesses to adopt a more proactive approach to their finances, ultimately leading to improved financial health.

Making Tax Digital for VAT is a transformative step towards a more efficient tax system. By embracing digital record-keeping and compliant software, VAT-registered businesses can simplify their tax processes, reduce the risk of errors, and focus more on growing their operations. Understanding and adapting to these changes is essential for all businesses to thrive in the evolving digital landscape.

Making Tax Digital for Income Tax

Making Tax Digital (MTD) for Income Tax is a new initiative by the UK government to modernise the tax system for self-employed individuals and landlords. Under this new system, eligible taxpayers must maintain digital records and submit quarterly updates of their income and expenses to HM Revenue and Customs (HMRC).

What does MTD for Income Tax mean for you?

If you are a sole trader or landlord with an annual gross income exceeding £50,000, you will need to comply with Making Tax Digital (MTD) for Income Tax Self Assessment (ITSA) starting April 2026. Those earning between £30,000 and £50,000 must comply by April 2027. Here’s what you need to know:

• • You must use compatible software to maintain digital records of your income and expenses.
  • You must submit quarterly updates to HMRC, reporting your income and expenses for the previous three months.
  • The quarterly updates will be due on the 7th of the month following the end of each quarter (e.g., August 7th, November 7th, February 7th, and May 7th)
  • After the end of the tax year, you must submit a final declaration to confirm your taxable profit and any other income.

How can you prepare for MTD for Income Tax?

To get ready for the transition to MTD for Income Tax, consider the following steps:

• • Familiarise yourself with the digital record-keeping requirements and compatible software options.
  • Discuss software options with your accountant or agent if you have one, as they may already be using compatible software.
  • If you plan to use spreadsheets, ensure you can digitally link them to bridging software to submit quarterly updates to HMRC.
  • To get used to the new system, keep digital records of your income and expenses as soon as possible.

By understanding the requirements and preparing in advance, you can make your business’s transition to MTD for Income Tax as smooth as possible.

Legislation and Timelines

Legislation and timelines for Making Tax Digital (MTD) are crucial for businesses to understand as they prepare for upcoming changes. Here are the key milestones:

• 2019: MTD for VAT became mandatory in April 2019 for UK VAT-registered businesses with taxable turnover above £85,000, with a soft landing period allowing manual data import. In April 2022, MTD for VAT was extended to all VAT-registered businesses regardless of turnover.
• April 1, 2022: This date marked the start of the first MTD VAT period. From this point, all VAT-registered businesses must comply with MTD rules, depending on their VAT start and end dates.
• April 2026: MTD for Income Tax Self Assessment (ITSA) will be introduced for sole traders and landlords earning above £50,000 annually. 
• April 2027: Sole traders and landlords with earnings exceeding £50,000 must comply with MTD for ITSA from April 2026, dropping to £30,000 from April 2027.

Understanding these timelines is essential for businesses to avoid penalties and ensure compliance. As MTD expands, staying informed about the legislation will help companies to adapt smoothly to the digital tax landscape.

Preparing for Making Tax Digital

Preparing for Making Tax Digital (MTD) is crucial for businesses to ensure compliance and streamline their tax processes. Here are some key steps to help you get ready:

1. Understand the Requirements: Familiarise yourself with the MTD guidelines specific to your business type. This includes knowing which taxes are affected, such as VAT and income tax, and the deadlines for compliance. Visit official resources like the HMRC website for detailed information.
2. Choose the Right Software: Invest in compatible accounting software that meets MTD requirements. Look for solutions that allow you to keep digital records, submit tax returns electronically, and integrate with your existing systems. Many software providers offer user-friendly options tailored for small businesses, making transitioning easier.
3. Train Your Team: Ensure your staff is well-informed about MTD and its implications. Providing training on the new software and processes will help them adapt quickly and efficiently. This preparation will ease the transition and enhance your overall financial management.

By taking these steps, you can confidently prepare your business for Making Tax Digital and enjoy the benefits of a more efficient tax system.

Exemptions and Opt-outs

Businesses are subject to various exemptions under Making Tax Digital (MTD), allowing certain groups to opt out of its requirements. 

Businesses Below the Threshold

• • VAT Exemption: Companies with a taxable turnover below the VAT threshold of £85,000 (as of 2024) are not mandated to comply with MTD for VAT. 
  • Income Tax Exemption: Sole traders and landlords earning below the MTD threshold of £50,000 (from April 2026) and £30,000 (from April 2027) are also exempt from MTD for Income Tax Self Assessment.

Certain Types of Businesses

• • VAT Exempt Businesses: Organizations whose supplies are exempt from VAT, such as financial services and education, may not need to adhere to MTD for VAT.
  • Public Sector Bodies: Some public sector entities, including local authorities and charities, may also qualify for MTD exemptions.

Opt-Outs

• • Digital Exemption: Businesses unable to utilize digital tools due to age, disability, or other valid reasons can apply for an exemption, provided they demonstrate their inability to comply.

Special Circumstances

• • Unusual Accounting Periods: Companies with accounting periods that differ from standard VAT quarters may have specific arrangements.
  • Complex Cases: Businesses with intricate VAT schemes may require additional guidance to align with MTD.

Transitional Arrangements

• • Extended Deadlines: New businesses transitioning from non-digital systems may receive extended deadlines to adapt to MTD.

To apply for exemptions, businesses should contact HMRC and provide the necessary documentation for their claims.

We offer VAT software to support your growth and streamline your accounting processes. With our user-friendly tools, you can efficiently manage your clients’ VAT submissions while ensuring compliance with MTD regulations. We are also MTD ITSA ready, and our updates will be rolled out in compliance with HMRC as per the estimated deadlines.

To get started, take advantage of our free trial package, allowing you to explore our software’s features without commitment. You can also book a demo to see how our VAT software can enhance your practice. Try Nomi today and simplify your approach to MTD!