There’s no doubt that Making Tax Digital (MTD) is a huge shift for both HMRC and UK businesses. In this week’s article, we break down the various stages underlying HMRC’s MTD rollout. Furthermore, we pinpoint key points for MTD compliance relevant to both VAT-registered businesses and sole traders. Read on as we look at the MTD timeline so far, what to expect next, and how you can comply today.
Timelines: Making Tax Digital
MTD for VAT
April 2019: Introducing MTD for VAT
April 2019 saw the introduction of MTD for VAT. Initially, MTD only applied to VAT-registered businesses turning over more than the VAT threshold (£85,000 at the time) in taxable income. This meant that the affected businesses needed to:
- Start maintaining their records digitally
- Submit VAT Returns using MTD-compatible software
April 2021: Digital links
Two years later, April 2021, represents a groundbreaking update: digital links. This change signalled the end of HMRC’s “soft landing period” for MTD for VAT, which had been extended during the coronavirus pandemic. The new rule states that your data transfer or exchange must be conducted digitally and without manual intervention. Tying in with the new requirement for digital record-keeping, this should lead to a reduction in human error.
Previously, you might have kept a hand-written ledger for your business, then manually typed in your financial details for VAT online. Now, however, this is not allowed: you must maintain digital records. Furthermore, you must avoid manually copying-and-pasting individual data values from one piece of software to another. Instead, you must establish a digital link, such as linked cells in a spreadsheet. Your data can then be uploaded directly to the HMRC system – without the risk of manual error along the way.
April 2022: No VAT threshold for MTD
In April 2022, MTD for VAT was adjusted to include all VAT-registered businesses, regardless of turnover or the VAT threshold. Therefore, if your business is registered for VAT, then you must send your MTD-compatible VAT Returns – even if turnover is less than £90,000 (the current threshold in 2024).
Income Tax Self Assessment
Whereas Making Tax Digital is already up and running for VAT-registered businesses, there is more to come. Over the next couple of years, this will be especially relevant for sole traders filing Income Tax Self Assessment. Let’s check out the MTD for ITSA deadlines as scheduled by HMRC:
Today: Voluntary participation
Although MTD for ITSA has yet to be made mandatory, it is currently already open for voluntary participation. If you want to get ahead of the curve, HMRC-recognised services such as AbraTax can help you to submit your MTD-compatible ITSA today.
April 2026: Initial rollout (£50,000 p.a.)
HMRC has scheduled April 2026 for the initial rollout of MTD for ITSA. From this date, it will be mandatory for sole traders with taxable income above £50,000 to:
- Keep digital records
- Use software to submit data every quarter
April 2027: Lowered threshold (£30,000 p.a.)
In April 2027, the threshold for MTD for ITSA will be lowered to £30,000 per annum.
The future…?
Earlier plans announced by HMRC discussed MTD compliance for businesses turning over £10,000 in taxable income. With this in mind, it is possible that the threshold might be lowered again after April 2027, eventually including this lower bracket.
How to comply with MTD
Due to HMRC’s step-by-step rollout, Making Tax Digital is affecting VAT Returns and Income Tax Self Assessment in different ways. Let’s explore things as they stand.
Compliance: MTD for VAT
If you are a VAT-registered business-owner, you should already have taken steps to comply with MTD for VAT (or have applied for an exemption). This is because the new regulations now apply to all VAT-registered businesses, regardless their turnover. In summary, this means that you need to:
- Maintain digital records
- Use digital links (rather than manual manipulation of data) where applicable
- Submit quarterly VAT Returns using HMRC-recognised software (or employ an agent to do so on your behalf)
One simple but effective way to ensure your compliance is to use MTD-compatible VAT bridging software such as AbraTax. In a few quick steps, you can connect your digital records through Excel (with digital links) and upload the data to HMRC for your VAT Return. This option is preferable as a low-cost option which allows you to remain in control.
Compliance: MTD for ITSA
MTD for Self Assessment has yet to be rolled out fully. At present, there is no requirement to use MTD – although you can begin using it voluntarily. Soon, though, it will become mandatory for all businesses to comply (within the next 2–3 years). As such, it is logical to begin preparations now:
- Get used to digital record-keeping
- Decide on MTD-compatible software (or even start using it now)
Regarding software for Self Assessment, AbraTax offers a totally free ITSA service with helpful guidance. As a HMRC-recognised Self Assessment supplier, we also provide automated input validation to help reduce any errors along the way. Register with us now to get ahead of the MTD curve. A stitch in time saves nine!
