The UK government initiated its endeavour to establish a more efficient tax system in 2019. In this article, we provide an update on the progress of Making Tax Digital (MTD) and discuss future developments.
Introduction to Making Tax Digital
Announced by former Chancellor of the Exchequer, George Osborne, in 2015, MTD aims to modernise the UK’s tax system. The objective is for HM Revenue and Customs (HMRC) to emerge as a world leader in digital tax administration. This necessitates businesses and individuals to maintain digital records and utilise MTD-compatible software for regular tax updates.
Key Objectives of MTD
MTD intends to make the tax system:
- More effective
More efficient
Simpler for taxpayers to comply
With an estimated £9.4 billion lost annually due to errors, MTD’s digital approach enables taxpayers to verify the accuracy of HMRC-held information.
MTD-Compatible Software
Although traditional spreadsheets and bridging software can still be used, MTD-compatible software like QuickBooks and Xero streamlines tax and accounting records management. This software allows you and your accountant to submit updates directly to HMRC.
Progress of Making Tax Digital
MTD for VAT
Launched on 1st April 2019, MTD for VAT mandates VAT-registered businesses with an annual turnover above the VAT threshold (£85,000) to maintain digital records and submit quarterly VAT returns using MTD-compliant software. As of 1st April 2022, this rule extends to businesses with a taxable turnover below £85,000.
Business Tax Account
MTD provides online business tax accounts for individuals, sole traders, partnerships, and limited companies, covering over 40 taxes, including self-assessment, VAT, PAYE, and corporation tax.
Future of Making Tax Digital
MTD for Income Tax Self-Assessment
Originally planned for April 2018, MTD for Income Tax Self-Assessment (ITSA) experienced delays due to the coronavirus pandemic and the need for businesses to prepare. The latest thresholds are as follows:
- Income over £50,000: MTD reporting required from 6th April 2026
Income over £30,000: MTD reporting required from 6th April 2027 - General partnerships with taxable income above £10,000 are expected to comply with MTD by 6th April 2025.
Exemptions
Individuals may apply for MTD for ITSA exemption if they meet specific criteria, such as impracticality due to location, disability, age, or religious beliefs against electronic submissions. HMRC will review each application individually.
Threshold Guidance
The government has not confirmed the application of the £30,000 and £50,000 thresholds. However, previous guidance suggests that these thresholds apply to gross income/turnover rather than profit.
Taxpayers affected by MTD for ITSA must maintain digital accounting records and use MTD-compatible software to submit quarterly updates to HMRC. Tax payments will follow the current schedule of payments on account and balancing payment deadlines.
Support for Making Tax Digital
Southside Accountants can assist with MTD compliance and help you select the most suitable MTD-compliant reporting software for your business. To book a free initial consultation, please fill in the online enquiry form.
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