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Contents

  1. 1. What is Making Tax Digital?
  2. 2. Is Making Tax Digital compulsory?
  3. 3. Making Tax Digital for VAT
  4. 4. Making Tax Digital for Income Tax Self Assessment
  5. 5. Making Tax Digital for Corporation Tax
  6. 6. Exemptions to Making Tax Digital

Is Making Tax Digital compulsory?

October 1, 2021
This article was updated 12th September 2022.
Whether you're a self-employed sole trader or a limited company, taxes are a headache you could do without. As well as paying Income Tax, you need to think about Corporation Tax, Value Added Tax (VAT), PAYE, business rates and – even though it’s not strictly a ‘tax’ – National Insurance contributions.

Considering all the paperwork, documents, receipts and spreadsheets you need to keep track of, accounting for all these taxes can be tricky. However, to make things easier, the way you pay your taxes is changing.In an effort to make taxes less taxing, HM Revenue and Customs (HMRC) has broadened the scope for Making Tax Digital, making it easier for business owners to file and send their tax returns to HMRC. But what exactly is Making Tax Digital, and does it apply to every business?

What is Making Tax Digital?

Before we dive into whether or not it's compulsory, we'll unpack what Making Tax Digital is exactly first.
Making Tax Digital (MTD) is a government initiative aiming to make tax return submissions quicker and easier for business owners. Following on from the introduction of the government's personal tax account, MTD requires business owners to store their tax records digitally and to file their tax returns using MTD-compatible software, with intentions to completely phase out paper tax returns.

Is Making Tax Digital compulsory?

At the time of writing, Making Tax Digital is only compulsory for VAT-registered businesses. Since April 2019, VAT-registered business owners with a taxable turnover above the £85,000 VAT registration threshold were required to comply with MTD for VAT, but with the latest expansion of MTD for VAT in April 2022, all VAT-registered businesses owners must comply with Making Tax Digital.

Making Tax Digital for VAT

If you're a VAT-registered businesses with a taxable turnover (everything sold that’s not VAT exempt) above the current VAT threshold of £85,000, you'll have been paying your VAT through MTD since April 2019.

However, as of April 2022 MTD has been compulsory for all VAT-registered business owners, irrespective of their taxable turnover.Under MTD for VAT, you'll need to store the following digital records for up to 6 years:
    Your business’ name and contact details VAT number and details of any schemes used VAT on supplies made and received Adjustments to returns Time of supply (tax point) Rate of VAT charged on supplies made Daily gross takings Purchases of assets you can claim tax on using the Flat Rate Scheme Value of sales made and total output tax on Gold Accounting Scheme purchases Documents covering multiple supplies made or received on behalf of your business

Making Tax Digital for Income Tax Self Assessment

While this is not compulsory until April 2024, if you’re a self-employed business owner, landlord or a limited company director earning dividends, you'll need to register for Making Tax Digital for Income Tax Self Assessment (MTD for ITSA).
Under MTD for ITSA, you'll be required to store digital business records and send income updates to HMRC four times a year in place of annually filing a Self Assessment tax return.

You’ll need to use MTD compatible software to file information and send a summary of your income and expenses to HMRC every three months, generating estimates of your end-of-year Income Tax bill. You'll also need to submit an annual tax report at the end of the year to generate your final tax bill.

Making Tax Digital for Corporation Tax

At the time of writing, HMRC hasn't released much material on Making Tax Digital for Corporation Tax – only that it's currently planned to come into effect in April 2026. Watch this space.

Exemptions to Making Tax Digital

If you file a tax return or receive income from anywhere other than standard PAYE payroll – for example, business owners, landlords, non-profit organisations and freelancers – it’s likely you’ll be affected by Making Tax Digital.There are, however, some people who will be exempt from using the new online system to manage their taxes. These include the following:
    Pensioners and individuals in employment (unless they have a secondary income of more than £10,000 a year from property or self-employment)The ‘digitally excluded’ – such as those living in rural areas with limited broadband access or people who are unable to use accounting software or apps because of their religion, disability or age
The tax office has also stated that it will consider exemptions on a case-by-case basis.If your business is already exempt from dealing with HMRC through other digital channels, you’ll continue to be exempt once Making Tax Digital comes into full effect.

Benefits of Making Tax Digital

Tax can be a complex subject to get your head around, so it’s no wonder mistakes are sometimes made when dealing with your accounts on paper and over the phone. HMRC believes it’s much easier to manage your taxes online. Here's why:
    Improved accuracy – figures can be input automatically, and information is sent directly to HMRC to avoid the risk of human errorSaves money – increased accuracy means you only pay what you oweEasier to understand – you get a centralised view of all your tax information, so you can see how your income tax has been calculated and you have an idea of what you owe at any point in time; meaning you won’t get any nasty payment surprisesLess work – basic information only needs to be submitted once, plus you no longer have to file yearly tax and quarterly VAT returnsSaves time – automation means fewer hours spent on admin tasks and more time focussing on the exciting parts of running your businessReduced risk of fines – you’ll be reminded to report the correct information at the right time, so there’s less chance of getting fined for missing deadlinesLess paperwork – making Tax Digital gathers information from different areas and makes it available to HMRC automatically, so there's no need to keep paper recordsFewer audit checks – There’s a lower chance of compliance checks from the tax office, as HMRC wants to “help businesses get their tax right first time and prevent them feeling punished for making honest mistakes”
Cam Finney
Cam FinneyHead of CX

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