MTD Guide: What do you need to know about MTD?

What is Making Tax Digital?

Making Tax Digital (MTD) is a system introduced in April 2019 designed to make it easier for businesses to get their tax right first time. In turn it is intended to reduce the costs, risk of errors and the worry that businesses face when HMRC has to intervene to put things right.

The MTD system currently encompasses VAT, with rollout plans for Income Tax Self-Assessment (ITSA) still due to come in in April 2026. Timetables for general partnerships and Corporation Tax digital requirements are yet to be determined.

Despite a strong start, HMRC’s MTD implementation faced challenges in scope, budget, and taxpayer readiness. Timelines were adjusted multiple times, and future plans aim to provide more preparation time for taxpayers while addressing operational complexities. The focus remains on digital transformation in tax reporting and record-keeping, aiming to improve accuracy and efficiency despite initial hurdles and delays.

A brief history of Making Tax Digital

• Initially announced as an upcoming initiative in 2015 as HMRC’s vision for the ‘end of the tax return’, in July 2017, HMRC revised the MTD timetable, delaying digital record-keeping requirements for VAT traders below the threshold until at least 2020.
• Further timetable changes occurred in 2020 and 2021 due to concerns about readiness among taxpayers and the impact of external factors (such as Brexit and COVID-19).
• MTD ambitions are to digitalise returns for VAT, Corporation Tax and Income Tax Self-Assessment. To date, however, it has only been implemented for VAT:
  • Digital record-keeping for VAT was implemented in stages, starting with businesses above the £85,000 turnover threshold.
  • The rollout completed in 2022, three years behind the original plan.
  • The process was simpler for VAT due to existing quarterly/monthly submissions and unchanged data requirements, but challenges arose from replacing legacy systems.
• MTD penalty regime was introduced from January 2023 with VAT late filing and payment reform.
• MTD for Self-Assessment (for self-employed and landlords) has faced more complexity than the implementation for VAT due to diverse taxpayer circumstances and income types. The planned rollout for Self-Assessment was deferred due to operational constraints, system complexity, and lack of taxpayer readiness.
• In December 2022, the Government announced a phased rollout of MTD for Income Tax Self-Assessment, start from April 2026 for those with incomes over £50,000. From April 2027, requirements will extend to those with incomes over £30,000, with further extensions still under consideration.
• Penalty reform for Self-Assessment, originally planned for 2024, is now expected to be phased in from 2026.

Are you MTD for VAT compliant?

From April 2022, all VAT-registered businesses are required to be compliant with MTD, regardless of turnover.

To ensure that you are fully compliant and ready for Making Tax Digital (MTD) as a VAT-registered business, it is important to understand the specific requirements for digital record-keeping and software compatibility. Under MTD, VAT-registered businesses must keep and maintain certain records digitally, which include crucial details such as:

• The tax point or the time of supply,
• The value of each supply (net excluding VAT),
• The rate of VAT charged for each transaction.

Additionally, your digital records should contain essential business information such as your business name, principal business address, VAT Registration Number, and details of any VAT accounting schemes you use.

To be MTD compliant, your chosen software must meet specific criteria. It should be capable of:

• recording and preserving digital records,
• submitting information and VAT returns directly to HMRC using their API platform, and
• receiving relevant information from HMRC via the same API platform.

It is important to note that the complete set of digital records required for MTD compliance does not necessarily have to be stored in a single location or program. Instead, these records can be maintained in various compatible digital formats, which collectively constitute the digital records for your VAT-registered entity, provided that the systems are ‘digitally linked’.

If you have any uncertainties or require further clarification, consulting with HMRC or a qualified accountant can provide valuable guidance tailored to your specific business needs.

What is a Digital Link?

Very simply put a digital link is the automated transfer of data or integration. This includes API transfer, CSV export/import of data or the linking of cells in excel between your systems and HMRC.

HMRC have said manually transferring information from non-digital records into an excel spreadsheet or accounting system, then ‘cut and paste’ to select and move information, make manual adjustments or consolidations to VAT returns outside of the accounting system will no longer be permitted.

For more information on digital links, please follow this link and navigate to section 4.2.1.

Charities

How are charities affected by Making Tax Digital?

As of April 2022, all VAT registered organisations must comply with Making Tax Digital (MTD) for VAT regardless of turnover – this includes VAT registered charities. In addition, exempted charities can make the decision to still report via MTD.

Do partial exemption and other adjustments have to be made digitally?

One very important concession which is relevant to charities is that only the total for each type of adjustment will be required to be kept digitally, not details of the calculations underlying them. If the adjustment requires a calculation, the calculation itself does not have to be made in the software. For example, partial exemption calculations can be carried out on a spreadsheet and the information can be transferred in manually – i.e., this step is not part of the MTD journey.

Partnerships

There is not currently a confirmed date for partnerships and MTD for ITSA, however, it is anticipated that they will need to comply at some point in the future.