What is Making Tax Digital?

Making Tax Digital is a key part of the government’s plans to make it easier for individuals and businesses to get their tax right and keep on top of their affairs.

HMRC’s ambition is to become one of the most digitally advanced tax administrations in the world. Making Tax Digital is making fundamental changes to the way the tax system works – transforming tax administration so that it is:

• more effective
• more efficient
• easier for taxpayers to get their tax right

Previously, VAT registered businesses with a taxable turnover above the VAT threshold (£85,000) were required to follow the MTD rules by keeping digital records and using software to submit their VAT returns. From April 2022, this has been extended to all VAT registered businesses, regardless of turnover. As a result, businesses will no longer be able to use HMRC Online Services to submit VAT returns and applies from the first VAT return with a period starting on or after 1st April 2022.

Challenges you may face with MTD:

• Converting manual records to a digital version (ie. Cashbooks)
• Converting spreadsheets into recognised cloud accounting packages
• Keeping software that will link directly with HMRC (ie. Xero or Quickbooks)
• Upgrading old software that will not be compatible for MTD purposes (ie. Desktop versions)
• Adapting bespoke software
• Additional costs associated
• Additional time processing

Can spreadsheets still be used?

Spreadsheets can be used to keep digital records – businesses will still need bridging software to submit VAT Returns digitally however.

Penalty for non-compliance with MTD:

HMRC can charge a penalty of up to £400 for filing a return that is not an electronic submission. This penalty has been extended to include the requirement to file under MTD using compatible software.

In relation to these MTD returns, unless there is a reasonable excuse, a person who fails to make a specified return using either MTD or the electronic return system is liable to the following penalty:

Annual VAT exclusive turnoverPenalty£22,800,001 and above£400£5,600,001 to £22,800,000£300£100,001 to £5,600,000   £200£100,000 and other   £100

How we can help…

At Pierce, our specialist Online Services team are expert in all things cloud accounting. We can assist you with the following:

• Selecting the most appropriate software for you and your business
• Implementing the software with you to fit your bespoke business needs
• Provide training initially and then as and when required
• Take the headache away and provide a full bookkeeping package and VAT returns, together with business support and advice
• Submitting VAT returns through bridging software if you prefer to do the bookkeeping yourself

Businesses that are uncertain about what the changes in HMRC legislation mean should seek advice from professionals, our expert team will be able to guide you through the legislation and requirements.

To discuss any of the information above, or to find out more about how Pierce Accountants can help you prepare for MTD, please get in touch, or visit our Online Services page here.

Future Planning for MTD ITSA and CT

Making Tax Digital for Income Tax Self-Assessment (ITSA)

Self-employed businesses and landlords with annual business or property income above £10,000 will need to follow the rules for Making Tax Digital for Income Tax from 6 April 2024.

You may already be using MTD-compliant software if you are VAT registered. These systems will be updated to submit your self-assessment returns quarterly too, rather than submitting your return annually by 31st January each year.

If you are not already using MTD compliant software, this will need to be in place before MTD ITSA comes into effect.

If you are a self-employed business or landlord you can voluntarily use software to keep business records digitally and send Income Tax updates to HMRC instead of filing a Self-Assessment tax return.

Making Tax Digital for Corporation Tax

Similar to the above for ITSA, HMRC will be looking to roll out MTD for Corporation Tax in April 2026. This will require all limited companies to maintain their records digitally and use MTD-compatible software to provide regular (quarterly) summary updates of their income and expenditure to HMRC. They will then be required to provide an annual CT return using their MTD-compatible software.