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Making Tax Digital: A business owner's guide to MTD

June 7, 2022
In an effort to make it easier for business owners to keep on top of their accounts, HM Revenue and Customs (HMRC) has been slowly digitalising tax data and submission through its flagship initiative, Making Tax Digital (MTD).
With Making Tax Digital for VAT now compulsory for all VAT-registered business owners, HMRC is slowly unfurling its plans to extend MTD into Income Tax and Corporation Tax over the next few years.

Here’s everything you need to know about MTD, what’s already been introduced and what HMRC have in the pipeline.

What is Making Tax Digital?

Making Tax Digital, or MTD, is a government initiative put forward by HMRC to digitalise tax data and tax submissions, replacing paper tax returns for all self-employed business owners, regardless of their annual turnover.
Under this scheme, small businesses and self-employed workers will need to store digital tax records and submit tax returns using HMRC-recognised MTD compliant accounting software — such as Ember.

In doing so, business owners are expected to make fewer errors in their tax submissions, minimising the risk of incurring fines as well as ensuring HMRC gets the tax they’re owed on time.

When does Making Tax Digital start?

Making Tax Digital is being introduced in phases, with Making Tax Digital for VAT first introduced in 2019. In this phase, only VAT-registered business owners with a taxable turnover above the £85,000 VAT-registration threshold needed to store digital records and submit their tax returns through MTD-ready accounting software.

As of April 2022, MTD for VAT became applicable to all VAT-registered businesses, irrespective of annual turnover. This meant that business owners who had voluntarily registered for VAT, despite earning less than the threshold, were now required to submit their VAT returns using MTD-approved software.From April 2024, Self Assessment taxpayers earning above £10,000 in a tax year will need to comply with Making Tax Digital for Income Tax. MTD for ITSA (Income Tax Self Assessment) was initially due to be introduced in 2023, but was pushed back by the government to give businesses time to prepare following on from the coronavirus pandemic.Making Tax Digital for Corporation Tax is expected to be the next phase of the initiative, although this won’t be due to come into effect until at least 2026.
DateMTD Legislation
April 2019VAT-registered businesses earning above the VAT threshold (£85,000) must store records digitally and submit VAT returns through MTD.
April 2022All VAT-registered businesses, irrespective of turnover, must submit returns through MTD (including voluntarily VAT-registered businesses earning below £85,000).
April 2024Self-employed workers and landlords earning above £10,000 in a tax year must submit their Income Tax Self Assessment through MTD.
April 2026MTD for Corporation Tax planned to come into effect.

Do I need to register for Making Tax Digital?

At the time of writing, you’ll only need to register for MTD if you’re a VAT-registered business, regardless of your annual income.Making Tax Digital for Income Tax won’t be mandatory for sole traders or limited companies earning above £10,000 in a tax year until April 2024, while partnerships earning above £10,000 in a tax year won’t need to register until April 2025.Making Tax Digital for Corporation Tax will not be mandated until April 2026, although the official date is still yet to be confirmed.

Making Tax Digital for VAT

As mentioned above, as of April 2022 if you’re a VAT-registered business it’s mandatory you comply with MTD for VAT. If you’re earning above the VAT threshold, you’d need to have complied with MTD for VAT since April 2019.

However, the latest changes in legislation now mean you’ll need to comply with MTD for VAT even if you registered voluntarily and are earning below the threshold.If you haven’t used MTD to store your VAT records or to file your VAT return before, you can work out exactly when you’ll need to sign up to MTD for VAT based on your VAT accounting period using the table below:
Your last VAT accounting period before signing up to Making Tax DigitalSubmit your VAT return betweenDo not sign up to Making Tax Digital fromSign up to Making Tax Digital fromYour first Making Tax Digital accounting period
1 Jan to 31 March 20221 April to 7 May 202228 April to 7 May 20228 May 20221 April to 30 Jun 2022
1 Feb to 30 April 20221 May to 7 June 202231 May to 7 June 20228 June 20221 May to 31 July 2022
1 March to 31 May 20221 June to 7 July 202229 June to 7 July 20228 July 20221 June to 31 August 2022
1 March to 31 March (monthly submissions)1 April to 7 May 202228 April to 7 May 20228 May 20221 April to 30 April 2022
A period of 12 months starting on or after 1 April 2021 and before 1 April 2022 (annual submissions starting on the first day of a calendar month)2 months after the last day of your accounting periodThe7 working days before your Making Tax Digital VAT return needs to be submittedThe day after your VAT return due date until 7 working days before your next VAT Return due date (almost a full year)A period of 12 months starting on or after 1 April 2022
Source: gov.uk

Before registering for MTD for VAT, you’ll need to make sure you have either a bridging software that connects non-compatible software, such as spreadsheets, up to HMRC’s systems, or a compatible digital software package that allows you to digitally store tax records and submit VAT returns.

With the Ember Pro Plan, you securely store your tax records and submit your VAT returns directly to HMRC from the Ember app, with a qualified accountant on hand to offer support should you need it.

If your VAT period began before 1 April 2022, you can continue using paper records until the end of that VAT period. However, once that VAT period is over, you’ll need to start storing records and submitting VAT returns digitally.Whatever you do, make sure you register for Making Tax Digital at the end of your VAT period, even if this is after 1 April 2022. Signing up to MTD for VAT in the middle of your VAT period will mean you won’t be able to finish processing your VAT return on your online VAT account. As a result, you may be fined.
If you pay your VAT bill by Direct Debit, make sure you don’t sign up to MTD for VAT too close to the VAT deadline as you might accidentally pay twice.

Avoid signing up:
    7 days before your return is due5 days after your return is due
If you pay your VAT bill using a method other than Direct Debit, make sure you’ve signed up to MTD for VAT at least 3 days before your return is due.

Making Tax Digital for Income Tax

While Making Tax Digital for Income Tax Self Assessment (MTD for ITSA) won’t be mandatory until April 2024, you can register voluntarily at GOV.UK if you’re:

    A UK residentRegistered for Self Assessment with returns and payments that are up to dateA sole trader with income from one business, or are a landlord renting out UK property
If you need to pay Income Tax on income from other sources, or need to report an Income Tax charge, you cannot sign up to MTD for Income Tax until 6th April 2024.

After the introduction of MTD for Income Tax, you’ll need to register if your annual qualifying income exceeds £10,000. Your qualifying income is classified as your total income in a tax year from self-employment and property income before any expenses are deducted.To register, you’ll need your:
    Business name Business start date, or the date you started collecting property income Email address National Insurance number Accounting periods Accounting type (e.g. cash or standard accounting)
Once registered, you’ll need to use MTD-compatible software to:
    Keep digital records of your business income and expenses Send quarterly updates of your business income and expenses to HMRC, including an End of Period Statement at the end of the fourth quarter to finalise each business income source Submit your Final Declaration to HMRC to include other sources of taxable income (e.g. savings, investment income)
The deadline for submitting end of period statements in 31st January after the end of the tax year, the same deadline as the present Self Assessment tax return and payment deadlines.

However, quarterly submission deadlines can either be standard or calendar. You must submit these updates within one month of the end of that quarterly period, or else risk incurring a penalty.
Standard quarterly period dates

Quarterly periodQuarterly deadline
6 April to 5 July5 August
6 July to 5 October5 November
6 October to 5 January5 February
6 January to 5 April5 May
Calendar quarterly period dates

Quarterly periodQuarterly deadline
1 April to 30 June5 August
1 July to 30 September5 November
1 October to 31 December5 February
1 January to 31 March5 May
Source: gov.uk

You’ll need to use a compatible software to digitally record your business income and expenses as close to the date of the transaction as possible and before submitting your quarterly update for the period.Here’s a brief summary of how MTD for ITSA will differ from the current approach to paying Income Tax for sole traders:
Before MTD for Income TaxAfter MTD for Income Tax
1 submission on 31st January annually4 quarterly submissions
Paper filings by 31st October annually1 annual End of Period statement for business income and 1 Final Declaration for all additional personal income
Digital submissions by 31st January annuallyAll filing to be done using MTD-compliant software
Both digital and paper records acceptedOnly digital records accepted

Making Tax Digital for Corporation Tax

Aside from the fact that MTD for Corporation Tax is likely to be introduced in April 2026, there isn’t yet much information available from HMRC on when it comes into effect, nor whether or not it’ll roll out in stages. Don’t worry about specifics yet though — with Ember, we’ll be sure that when any updates are announced, we’ll be ready to support you.

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