Making Tax Digital (MTD) makes it compulsory for businesses to use a digital system to keep tax records, submit tax data and make payments.
Currently, MTD applies only to VAT, although a pilot for income tax is in progress. HMRC plans to expand the scheme over time to include other forms of business tax.
This article explains how MTD works, what it means for how businesses operate, and how to register for the scheme.
What is Making Tax Digital?
Making Tax Digital (MTD) is a government scheme created to encourage businesses to manage their tax records online using dedicated software. It aims to simplify the process of record‑keeping and payment and ease the burden of costly administrative errors.
How does it work?
At present, MTD applies only to VAT, although a pilot for income tax is underway. HMRC proposes to expand the scheme to include all business taxes.
All VAT-registered businesses with a taxable turnover above the current VAT threshold set out by HM Revenue & Customs (HMRC) must use MTD-compatible software to manage their VAT records and send VAT returns to HMRC.
This applies both to limited companies and sole traders, and is mandatory for VAT return periods starting on or after 1 April 2019.
What does submitting tax information “digitally” involve?
It means transitioning from paper-based or spreadsheet accounting to an electronic system. It also eliminates the often time‑consuming task of manually entering data into HMRC’s website.
What if my business already uses accounting software?
If you already use accounting software (for example, Sage, QuickBooks or Xero) to manage your finances, the good news is that most existing programs are compatible with MTD. However, if you aren't using software already, you’ll need to acquire some.
Does it apply to my business?
HMRC is introducing MTD in phases, with VAT being the first (starting from April 2019). At the moment, only UK VAT‑registered businesses with a taxable turnover of more than the current annual threshold for VAT must file their VAT returns using a digital system.
Businesses with a taxable turnover below the VAT threshold can opt to register and file their tax returns digitally via MTD.
Are any businesses exempt from MTD?
The ultimate aim is for all businesses to use MTD. However, HMRC may consider granting an exemption if there’s something that prevents you from complying fully with the scheme’s requirements.
Your business might be exempt if, for example:
- you lack internet access at your business premises and are unable to relocate somewhere that does have access
- your age or disability stops you using electronic devices for the time it takes to manage digital tax records
- you or your business are in the process of becoming insolvent
- using electronic devices or keeping electronic records goes against your religious beliefs
- you’re already exempt from submitting VAT returns online
If you feel your business may be exempt from MTD, you need to contact HMRC.
What impact will it have on my business?
The impact should be positive. HMRC created MTD to help make managing business taxes less complicated and more efficient.
The idea is that having all your data on a digital system, in real time, gives you a fuller picture of your business’s tax responsibilities and a much easier way of managing them.
Benefits of Making Tax Digital
More efficient and straightforward
The streamlined process that MTD provides should not only give you a better understanding of your financial position but also enable you to work more effectively.
That means you can dedicate more of your valuable time to other areas of the business and keep growing as a result.
More accuracy means fewer mistakes
A digital system should limit avoidable mistakes that can slow the tax reporting process down.
Such errors not only make things more stressful and time-consuming — and possibly land you with a fine if your filings are late — but cost the Government billions of pounds each year too.
An opportunity to transform your business
Going digital might seem daunting but it also gives you an opportunity to assess and improve some of your accounting practices.
Having access to real-time information about your finances lets you see exactly how your business is performing, enabling you to calculate your taxes with ease and budget more effectively. As well as reducing paperwork, moving away from paper-based accounting also gives you the chance to work anywhere at any time.
Drawbacks of Making Tax Digital
Making Tax Digital requires compatible accounting software. It’s up to you (not HMRC) to implement this if you don’t have it already. And you’re the one who needs to pay for it.
Most accounting software packages are cloud-based subscription services that carry a monthly fee of around £10–£20, so they’re generally an affordable investment for the majority of small businesses.
Lack of internet access
Switching to an online system depends on having access to a reliable internet connection. There may be reasons why you can’t use digital tools to keep records or submit your returns. You should contact the VAT helpline if you think this applies to you.
Easily avoidable mistakes in tax filings cost the Exchequer over £9 billion every year.
What digital records do I need to keep?
Making Tax Digital doesn’t change the types of tax records your business is obliged to keep. It only influences how you manage and submit your tax information.
For VAT, this means keeping a digital record of information such as:
- name, address and contact details for your business
- your VAT registration number and details of any VAT accounting scheme you use
- the amount and rate of VAT charged on supplies you’ve made and received
- any adjustments you’ve made to correct errors in your returns
- the time of supply (tax point) for each transaction — that is, the date the transaction took place
You’ll also need to record data on things like:
- debit and credit notes
- imports and exports
- any VAT-exempt items you’ve bought or sold
- any expenses that don’t incur VAT
The Government’s website has a more comprehensive list of what VAT records to keep for MTD.
What is a digital record?
It’s a record you:
- create with online accounting software or by taking a digital photo (for example, photographing paper receipts)
- store and view on an electronic device such as a smartphone, tablet or computer
What accounting software should I use?
Your software needs to be compatible with HMRC’s system for administering Making Tax Digital. It must be able to connect to this system and let you submit your data to HMRC. It must also be authorised — ask your supplier if you don’t know how to do this.
HMRC doesn’t provide software. However, most accounting software packages on the market should be compatible with MTD and more programs are being developed all the time. If you already use one of these packages, confirm with your supplier that it will work with MTD.
HMRC intends to phase out its current system for submitting tax information, after which time you’ll not be able to use it.
Visit our page on MTD-compatible accounting software to learn more about your options and how to acquire software for your business.
How do I register for MTD?
First, make sure you (or your accountant or agent) have accounting software you can use to submit data to HMRC.
When you go to sign up on the Government’s MTD page, you’ll be asked for:
- your Government Gateway ID and password
- your business’s VAT number
- a business email address
You might also have to provide:
- your National Insurance number — if you’re a sole trader
- your company registration number and unique taxpayer reference (UTR) for corporation tax — if you’re a limited company
Once you’ve signed up, HMRC will send you a confirmation email within 24 hours. You must wait until you’ve received this email before you submit any tax data.
Am I too late to apply? Will I be fined?
Although Making Tax Digital came into force on 1 April 2019, HMRC accepts that it will take time for businesses to register for the scheme. Because of this, it’s allowed a one-year period for businesses to become familiar with the new system and sign up for it without facing any financial penalties.
If you haven’t yet registered for MTD, you should do so as soon as possible or contact HMRC if you believe that your business should be exempt.
When will it come into effect for other business taxes?
It’s expected that HMRC will expand Making Tax Digital to cover income tax and corporation tax in the coming years, possibly during 2021. A pilot scheme for income tax is already underway.
The eventual aim is to implement a modern, advanced digital system that includes all business taxes.