VAT-registered businesses with a turnover higher than £85,000 are already required to submit their VAT return via the Making Tax Digital scheme, but MTD is an ongoing process which will soon include income tax reported through Self Assessment.
From April 2024 self-employed people and landlords earning over £10,000 a year must be compliant for MTD for Income Tax Self Assessment (ITSA). Now is the time to put the wheels in motion!
What is Making Tax Digital for Income Tax Self Assessment (ITSA)?
Put simply, MTD requires businesses to keep digital records of their finances, and submit information using compatible software approved by HMRC. The idea behind it is to make it easier for businesses and individuals to stay on top of their tax commitments, and for accurate tax payment to be more efficient.
MTD ITSA is the stage which applies to those who submit Self Assessment tax returns to pay income tax.
You can opt-in to MTD before you’re required to, but once you’re signed-up, you have to follow the rules! If you’re a new business just starting up, or even if you’ve been going for a while, we strongly recommend making the move to MTD-compliance as soon as possible. Even though it may not be compulsory for you yet, doing so could save a big headache later on.
When will my business be affected?
This depends on what type of tax records you’re required to keep and submit. You must be MTD-compliant:
- Now: For VAT if you’re VAT registered and your turnover is higher than the registration threshold.
- From April 2022: For VAT, even if no VAT is owed. This means you will need to follow the MTD for VAT rules for the first full VAT period that comes after April 2022, and each one after that.
- From April 2024: For Income Tax Self Assessment.
MTD is about much more than simply paying your tax bill, and the real focus is on robust digital record keeping. If you use a variety of accounting software for various purposes, they’ll need to be “digitally linked”.
This isn’t always easy, so take the time to prepare well in advance, and definitely talk to your accountant! Many accountants will help you get signed up with MTD-compatible software if you ask them. Essentially, if MTD doesn’t (yet) apply to you, then now is a good time to put out the feelers.
What software is compatible with MTD?
While traditional spreadsheets can be used alongside ‘bridging software’, businesses and their accountants can also choose to use dedicated accounts software.
What features should my MTD software have?
There are lots of software options out there, but be sure to take a good look beyond the marketing write up. Some software providers advertise themselves as MTD compliant, yet still require you to download a report and submit your return through a separate portal. Ideally you should be able to report and submit from within the software itself.
Look for tools to help you manage your day-to-day business activities as well as a offering detailed information in real time. This will help you spot any missing information more easily, so you’re less likely to make mistakes. It allows for better financial and business planning generally.
If you’re already signed up with a software provider then it’s worth checking that your existing package is fit for purpose. If you do need to make the move or upgrade it can take time, which is why we recommend not leaving it all to the last minute!
I’m already using a cloud-based accounting package, does that make me automatically MTD-compliant?
Making Tax Digital has been on the radar for a while, so any fairly new cloud accounting software is likely to be MTD-friendly. Just keep in mind that some software providers might focus more on other countries, so their approach to MTD might be a bit of an after thought.
We can’t really emphasise this enough – you need comprehensive software that ticks all the boxes. Start researching now and if you have an accountant, discuss it with them as soon as possible. They’ll be able to use their experience to guide you in the best options for your business. It’s tempting to leave it, but that’s really not a great idea!
For those who will be affected by the April 2022 VAT update for MTD, time is of the essence. But for everyone else who will be affected from 2024, you also need to act soon.
- 2022 (and ’24) will come round faster than you think. We get it. But the weeks fly by and the last thing you want is to be stressing at the last minute. Also, if you need to start keeping records, update software or change some of your internal processes, you may hit problems you can’t predict. These will take time and brain space to solve.
- Large numbers of businesses will be affected. As times goes on, there’s likely to be huge congestion. Your accountant and software provider may be swamped and less able to help. The same applies to the HMRC helpline – so get in there early.
Some self-employed people, businesses, agents, and landlords already maintain digital records and provide updates to HMRC as part of a pilot scheme, rather than completing a Self Assessment tax return. You can also sign up on a voluntary basis on the Sign Up Your Business for Making Tax Digital for Income Tax page of the Gov.uk website.
Making Tax Digital for Corporation Tax
After 2024, the next big rollout is expected to be MTD for Corporation Tax. However, HMRC have made it clear that this won’t happen until at least 2026. We’ll put together a more detailed article nearer the time.