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 and income tax.

MTD for income tax is specifically aimed at people who complete a self assessment tax return including self employed individuals and landlords.

To implement all of the proposed digital ideas HMRC is gradually phasing them in based on income levels.

Making tax digital for income tax means that self employed individuals and landlords with an income of more than £50,000 will need to follow the MTD requirements from April 2026.

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

Individuals with a turnover above a threshold of £20,000 are expected to join MTD income tax from April 2028.

What do I have to do for MTD for income tax?

There are a number of changes that need to be considered before your first MTD submission date.

They range from the software you use to the records you keep.

Key making tax digital features include:

• The software you use to report your tax information to HMRC under MTD will have to be from a third party commercial provider.

HMRC has confirmed that they will not develop their own software or application to replace the free self assessment tax return service they currently offer.

This makes it essential to choose or invest in a system that meets your business requirements and financial constraints.

• 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.
• 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 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 a MTD for ITSA final declaration?

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.

What is EOPS for MTD?

HMRC have confirmed that the EOPS has been removed from MTD with it no longer being necessary.

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

Making tax digital for 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.