Making Tax Digital is a new scheme brought in by HMRC to make it easier for businesses and self-employed workers to pay their taxes and keep on top of their financial affairs.

The latest figures show that in the financial year between 2018 and 2019, common mistakes made on tax returns cost the government around £8.5 billion. Making Tax Digital has been introduced to save money for the government, businesses, and the self-employed in the long term.

HMRC aims to become the most digitally advanced tax collector in the world and Making Tax Digital is integral to this process. But what exactly is it? And how might it affect you and the taxes you or your business pay each year?

We are going to take a look at Making Tax Digital, what it is, who it affects, and when it comes into action.

Making Tax Digital (MTD) is HMRC's plan to get small businesses and self-employed people to complete all of their tax records and returns digitally, with the eventual goal of going entirely paperless. MTD aims to make it easier for people to keep on top of their tax affairs, for both businesses and the government to save money, and to encourage less paper waste for environmental reasons.

In 2015, HMRC introduced the Personal Tax Account, a digital account that allows people to manage their taxes online. Then in 2019, the phase of MTD was introduced with the launching of MTD for VAT, which involves making digital records to complete VAT tax returns. However, most of the MTD systems have yet to be mandated, though the dates on which they will have already been set.

So let's now jump in and take a closer look at some of the different taxes that can now be recorded digitally.

Why is Making Tax Digital being introduced?

Initially, MTD was brought in to help combat the large number of tax errors that are made each year, which cost billions for the government to rectify.

MTD will also encourage businesses to update their software and modernise their systems. Although this may cost a bit to set up, over time the new software will save businesses both time and money. New software uses more automation and it is now so advanced that errors are highly unlikely. It also means that businesses can spend less time on the accounts and more time focussing on growing the business.

There is also the added bonus that going entirely paperless has a hugely positive effect on the environment as far fewer trees need to be felled.

HMRC stated that its aims for bringing in MTD are to make tax processing:

  • more effective
  • more efficient
  • easier for taxpayers to get right.

Making Tax Digital for VAT

So far, MTD for VAT is the only compulsory tax return that must be completed using the new system.

Any business that has a taxable turnover of £85,000 or more must register for VAT. As of April 2019, if you want to submit VAT returns and receive a rebate on products bought for business purposes, then you must now sign up to MTD for VAT and keep your VAT records entirely digital.

Previously, a small business owner who ran a business that turnover below the £85,000 VAT threshold could choose to voluntarily join the MTD for VAT. However, from April 2022, they too will be required to follow the MTD rules as long as they are VAT registered.

So if you run a business, big or small, and request VAT returns, you must do so using the new MTD for VAT system.

Making Tax Digital for Income Tax

From April 2024, self-employed people with a taxable income and landlords with property income above £10,000 will be required to register their income tax returns via Making Tax Digital for Income Tax. This is a year later than the original date as there were delays due to the Covid-19 pandemic.

Although MTD for Income Tax is not yet mandatory, you can still sign up for a digital tax returns pilot scheme to digitally record and send Income Tax updates to HMRC. This is done in lieu of filing a Self Assessment tax return. HMRC estimates that around 30% of businesses and landlords have signed up voluntarily so far.

HMRC says the new system lets you see how much income tax you owe as you go. Signing up for the pilot scheme will also give you time to adjust to the process before it becomes mandatory.

Making Tax Digital for Corporation Tax

MTD for Corporation Tax will not be mandatory until 2026. Before then, businesses are welcome to take part in a pilot scheme once HMRC has processed a recent consultation they carried out with businesses.

What are the deadlines for Making Tax Digital?

As we have seen, MTD is being introduced gradually rather than all at once. This is in order to allow businesses and self-employed workers to have time to adjust to the new system and trial the pilot schemes before they become compulsory.

Here is a complete timeline of the past and future deadlines for when certain taxpayers must abide by the new Making Tax Digital rules:

  • April 2019: VAT-registered businesses with a turnover above £85,000 need to keep digital records and submit digital VAT returns using compatible software.
  • April 2022: MTD is made compulsory for VAT registered businesses with a turnover below £85,000, for making their VAT returns.
  • April 2024: MTD will apply to self-employed workers who file income tax Self Assessments for business income, and for landlords who have a property income of more than £10,000 a year.
  • April 2026: MTD will be introduced for businesses to pay Corporation Tax.

Making Tax Digital software

Many businesses still use spreadsheets to complete their accounting, though more and more are choosing to use specialist accounting software.

When Making Tax Digital is mandated, all businesses must use compatible accounting software to send digital tax returns to HMRC. HMRC has their own list of software that is compatible with its system, including Zoho, Xero, and Quickbooks.

Making Tax Digital is a new method of processing taxes that is entirely digital. Although most taxes have yet to be fully digitised, businesses and the self-employed are encouraged to start digital record keeping in order to be prepared for when the proposals become mandatory.

Although the process of switching to Making Tax Digital may cost businesses at first, it is expected to save businesses, HMRC, and the self-employed money in the long term.