Making Tax Digital
HMRC are introducing Making Tax Digital (MTD) to make it easier for individuals and businesses to get their tax right and keep on top of their affairs. HMRC’s vision is for the UK to be one of the most digitally advanced tax administrations in the world. It is estimated that over £9 billion is lost annually in tax due to errors and mistakes, and it is hoped that digital record keeping will help prevent errors associated with manual processes.
How does MTD work?
The long-term aim is for all businesses to maintain their records in digital format so that this can be used as an interface with HMRC. HMRC will receive the information you submit much earlier than at present, and you will have access to a personal and business account which shows how much tax you owe. Working via cloud approved software will enable you to report and pay your tax with ease.
When does it start?
MTD is gradually being phased in and will eventually apply to all taxes.
The first stage applies to VAT registered businesses. From April 2022 all VAT registered businesses need to use HMRC compatible software to file their VAT returns. There is no longer an option to do this via the HMRC portal or on paper.
The next stage commences in April 2026 and will apply to Income Tax, but only to a select number of people, namely landlords and sole traders who have income above a certain level.
You will need to join MTD for Individuals if you receive income from property and/or self-employment that together total more than £50,000 in the 2024/25 tax year. This will be expanded to those whose turnover exceeds £30,000 in 2025/26:
- MTD from April 2026 if relevant turnover was more than £50,000 in the 2024/25 tax year.
- MTD from April 2027 if relevant turnover was more than £30,000 in the 2025/26 tax year.
What is meant by ‘turnover’?
For VAT purposes, turnover means your taxable supplies, before charging VAT. Supplies made which are exempt or outside the scope of UK VAT, such as when you supply services to businesses outside the UK, are not taxable supplies.
For income tax purposes, turnover will initially be just the sole trader income, UK property income and foreign property income as reported on your self-assessment tax return for the appropriate year. This will be for the tax year completed with its deadline before April, so 2024/25 with the deadline January 2026 for 2026/27.
Income from property held in joint names is split 50:50 for the purpose of assessing turnover.
I’m using FreeAgent, is this compatible?
Responsibility to register
For VAT, registration to MTD is now automatic on registration for VAT, so there is no need to ‘sign up’.For Income Tax, it is the responsibility of the individual to identify when they need to register for MTD and to do so via their online account with HMRC.
Reporting
Every VAT return, whether monthly, quarterly or annual, must now be submitted using software.
For Income Tax, you have the option to report quarterly on a tax return basis to 5 April every year, in which case the first quarter would be 6 April to 5 July 2026, or on a calendar year basis to 31 March for which the first quarter would be 6 April to 30 June 2026.
Non-UK resident or non-UK domiciled?
Partnerships or businesses run through a company
Will MTD for Income Tax apply to you?
From 2024/25 onwards, if your tax return shows turnover from self-employment and/or rental income that amounts to more than the relevant MTD threshold, HMRC will notify you that you need to sign up for MTD.
If you think MTD is likely to apply to you, you will need to start to consider which software you will use and the quarterly reporting requirements. Penalties will apply if deadlines are not met. If you would like help, get in touch with us as soon as possible. Competex would be happy to engage as your agent and handle all aspects of the reporting for you.
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