What is Making Tax Digital?

Making tax digital or MTD for short is the name given to the governments initiative which is tasked with improving the UK tax system through the use of digital solutions.

The MTD project is involving many different types of tax including VAT, income tax and corporation tax.

The undertaking to implement all of the proposed digital ideas is huge which means making tax digital is being phased in over a number of years.

Due to technical difficulties and unforeseen circumstances like the Covid 19 pandemic MTD launch dates have been delayed.

Our making tax digital guide is based on information provided by the government on the 19 December 2022.

It is possible that the dates provided in December 2022 could be changed again in the future so it’s important to check any further government updates that may effect you.

Making tax digital for income tax

MTD for income tax is also known as ITSA which stands for income tax for self assessment. MTD for ITSA is specifically aimed at people who complete a self assessment tax return for example self employed individuals and landlords.

The making tax digital for ITSA launch date has been set for April 2026 which as changed from the previous date of April 2024.

A delay to MTD for ITSA has happened to allow for improvements that should mean it is delivered more effectively.

What does MTD for ITSA mean?

MTD for ITSA means that self employed individuals and landlords with an income of more than £50,000 will need to follow the MTD for ITSA requirements.

For those with an income of between £30,000 and £50,000 the MTD for ITSA live date has been penciled in for April 2027.

Key MTD for ITSA details:

  • All accounting records should be kept electronically using accountancy software or other digital option.
  • A quarterly tax return needs to be submitted to HMRC including all income and expenditure and other relevant information.
  • An EOPS or end of period of statement submitted for each trade or property business.
  • A final end of year declaration needs to be submitted after the end of the tax year.
  • Initially the timing of tax payments to HMRC will not change with payments on account and balancing payments being due by the 31 January after the tax year ends remaining as is.
  • The quarterly reporting, EOPS and final end of year declaration replaces the need to complete an annual end of year self assessment tax return.

MTD for ITSA quarterly reporting

One of the biggest changes being brought in under MTD for ITSA is the need for quarterly reporting.

The quarterly updates provide HMRC with the most recent quarters income and expenses figures with a separate quarterly update necessary for each source of trade or property income.

Strict deadlines are in place for each quarter with your accounting period end not effecting the quarterly reporting deadlines.

The quarterly reporting filing deadlines are currently set at 5 August, 5 November, 5 February and 5 May.

What is EOPS for MTD?

The end of period statement or EOPS is used to make accounting adjustments and finalise your businesses tax position.

The EOPS has to be completed for each source of business income so if for example you have three sources of business income you will need to complete three end of period statements.

You will need to submit an EOPS at the end of your accounting or basis period but not before.

What is a MTD for ITSA final declaration?

A final declaration is needed in combination with the EOPS submissions to determine your final tax liability.

A final declaration is submitted only once and includes information from end of period statements and other sources of income like bank interest and company dividends.

Your final declaration needs to be to be submitted to HMRC by the 31 January after the tax year ends.

MTD for ITSA Smaller Businesses

Smaller businesses with income under the £30,000 threshold will be notified of changes under MTD at a later date.

The government will review businesses with an income under £30,000 in due course with no announcement date set to confirm their intentions for this group under making tax digital for ITSA.

If you are included in this group it would be a good idea to start keeping all accountancy records digitally if you aren’t already doing so.

Keeping digital records now prepares you for any future changes to record keeping requirements and is a great way to securely store your accounts all at the same time.

General partnerships were due to be mandated into MTD for ITSA in 2025 however this date will pushed back to a date which is yet to be confirmed.

What are digital records for MTD?

A big part of making tax digital is the necessity to keep accounting records digitally. This can be a challenge if you have never done it before however can be an easier and more secure way to keep accountancy records if done correctly.

HMRC does not offer a software solution to keep records digitally so you will need to consider a software package that fits your business needs.

Types of MTD compliant software include:

  • Third party software packages that usually incur a fee which can be used to store your digital records and file returns directly to HMRC.
  • Third party bridging software (that usually incurs a fee) that enables existing spreadsheet records to be submitted to HMRC.
  • API enabled spreadsheet software that has the capability to file returns to HMRC.

Making Tax Digital for VAT

Making tax digital for VAT is applicable to all businesses that are registered for VAT. Unless exempt all VAT registered businesses should already be reporting their VAT obligations through the MTD for VAT software.

From the 1 November 2022 you have to use MTD for VAT and use compatible software to submit VAT returns and keep VAT records.

It is important to keep digital records from the start of your first MTD accounting period.

You can sign up for MTD for VAT through .GOV and following their application instructions.

Making Tax Digital late penalties

Making tax digital brings with it a new penalty system for both late filing and late payment of tax.

The MTD late penalty system aims to be fairer with a more sympathetic approach to genuine one off reasons for late submissions and payment of tax due.

It is based on a points system with penalties being imposed when a points threshold is met. For late filing the penalties vary depending on the type of MTD submission being made.

You can read more about penalties for late filing and late payment under MTD for ITSA here in our MTD penalty guide.

MTD digital exclusions

HMRC gives some exclusions to making tax digital for ITSA in particular circumstances. If it is not reasonable or practical for you use a computer or software to keep digital accountancy records HMRC can consider an exemption.

To become exempt you must apply to HMRC and they will reply to you confirming their decision.

The reasons for being exempt from MTD for ITSA include:

  • Disability.
  • Age.
  • The location where you live.
  • Religious grounds.

Some entities are automatically exempt from MTD for ITSA including:

  • Non resident companies.
  • Administrators.
  • Trustees and Executors.
  • Foreign businesses of non UK domiciled individuals.

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