Making Tax Digital


Making Tax Digital (MTD) is the most fundamental change to the tax system for at least 20 years and the essential elements for businesses and landlords are:


Under the MTD rules paper accounting records cease to meet requirements and are no longer deemed as sufficient: In order to comply it will be necessary for almost all businesses (self-employed, partnerships, LLPs and limited companies) and larger landlords to use software or spreadsheets to keep their accounting records.

Quarterly reporting: Three-monthly reporting of VAT figures is standard; however, when ‘full MTD' is implemented there will also be a requirement to submit trading data to HMRC each quarter directly from bookkeeping software or spreadsheets, and it must be sent within one month of the end of each quarter. These updates will include details of business (or rental) income and the related business expenses by cost type. Potentially the quarterly data submissions under full MTD could be fairly unrefined and so once we have prepared your normal annual accounts it will be necessary to overwrite the existing quarterly details by submitting an EOPS (End of Period Statement) in order to bring the figures that HMRC already has in line with the annual accounts. The EPOS must be submitted by the earliest of 10 months following the end of your accounting year or the subsequent 31st January next. 

Naturally, we will try to help you through the changes that MTD will bring. However, the changes will be so fundamental that, ultimately, it will be necessary for you to become involved with the quarterly reporting to HMRC. If you currently operate computerised bookkeeping then the procedural changes should be relatively minor – slightly more so if your records are spreadsheet based – although it will be a complete sea change for those currently keeping fully manual bookkeeping records.


When does MTD become relevant?

VAT: It started on 1st April 2019 and so if your business is registered for VAT and your turnover is above the VAT threshold, currently £85000 per annum, then you should already be complying with MTD, therefore keeping digital accounting records and submitting your VAT Returns using MTD compatible software. As a result HMRC's older style online VAT Return portal will now be closed to your business.

IMPORTANT: VAT registered businesses with an annual turnover below the VAT threshold are not yet subject to the MTD rules. This will change with effect from 1st April 2022 when those businesses will also be required to adopt MTD in respect of VAT.

Income Tax (self-employed, partnerships, LLPs and larger landlords who complete self assessment tax returns): The Government intends for the full version of MTD to become mandatory for income tax reporting with effect from April 2023.

Once the full version of MTD is in situ the annual Tax Return will disappear for those in MTD and, as well as the quarterly submissions and the annual EOPS mentioned above, there will be a requirement to submit a 'Final Declaration' each year. This will formalise matters for the tax year in question and will be made on an individual rather than a business basis.

Corporation Tax (limited companies): Timings are yet to be confirmed. Some suggest that HMRC may monitor the progress of MTD for income tax before concentrating on the corporation tax side.


Are there any exemptions?

In theory, there are exemptions (VAT) and there should be exemptions (income tax) for those unable to engage with the digital world for religious reasons or because of age, disability or location (e.g. no availability of broadband).

As already mentioned, VAT registered businesses with a turnover which is below the VAT threshold (currently £85000 per annum), such as lower turnover businesses that voluntarily registered for VAT or where income has declined to a level below the threshold, will initially be exempt from VAT MTD reporting. However, as also mentioned above, the Government is to remove this particular exemption with effect from April 2022. Until it does those businesses can continue to submit their VAT Returns using the existing HMRC online portal.

When full income tax related MTD becomes mandatory there is to be an exemption for businesses and/or landlords that have a very small annual turnover; it is currently predicted that gross annual income of £10000 or less will qualify as exempt.

For partnerships it will be the overall business turnover that defines whether or not that business must be included in MTD, not the deemed individual partner share of turnover.

It should also be noted that turnover from multiple businesses and/or property rentals must be combined for the purpose of assessing if the low turnover exemption applies. For example, if someone received ad hoc self-employed fees of say £3000 and, alongside, he/she had annual gross property rents of say £8000 then MTD would apply - i.e. their combined income would exceed £10000.



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