At the end of July, just a day before the Westminster parliament closed for summer recess, the Treasury published a series of policy announcements, including a new schedule for Making Tax Digital (MTD).

MTD was one of many policies that had to be set aside as the coronavirus pandemic broke out and the Government focused instead on implementing emergency support, but the need for the scheme has become even clearer this year.

As Jesse Norman, financial secretary to the Treasury, put it:

“The COVID-19 pandemic has highlighted the need for a more flexible, resilient and responsive tax system that provides businesses and HMRC with more up-to-date information on businesses and their finances, and enables easier identification and better targeting of taxpayer support.”

Under the new timeline:

  • The MTD for income tax pilot will be expanded from April 2021.
  • MTD for VAT will be extended to all VAT-registered businesses from April 2022.
  • MTD for income tax self assessment (MTD for ITSA) will be introduced from April 2023.

MTD for VAT

The first compulsory stage of the scheme, MTD for VAT, launched on 1 April 2019, and applied to all VAT-registered businesses with a turnover above the VAT threshold of £85,000.

Those businesses must keep digital records for VAT and submit their VAT returns using compatible software.
Currently, businesses can use manual links – such as copy and paste – to move information between different pieces of software, but from April 2021 they will be required to put digital links in place so all information is transferred automatically.

In March this year, HMRC published a review assessing the success of the scheme so far, and reported that its usage matched forecasts, with 1.4 million businesses signed up and more than 4 million tax returns submitted.

Overall, HMRC said, the service has worked well in its first year, with businesses reporting reduced errors and more efficient processes.

While there were some concerns around awareness to begin with, as only 60% of businesses had heard of the scheme in May 2018, that percentage increased to 98% by July 2019.

Initial problems with long waiting times on HMRC’s support lines were also ironed out, with callers waiting less than five minutes on average between June 2019 and March 2020.

With a full year of MTD for VAT implementation complete, HMRC plans to extend the scheme to all VAT-registered businesses.

Businesses that are registered for VAT but have a turnover below the VAT threshold will be required to follow the scheme’s rules from 2022.

MTD for ITSA

HMRC has also turned its attention to the next major stage in mandatory digital tax reporting: income tax.

From 6 April 2023, all self-employed businesses and landlords with income above £10,000 will be required to follow MTD for ITSA rules.

This means sending HMRC a quarterly summary update of their business income and expenditure with a ‘finalisation’ process at the end of the year. Eventually, this should replace the use of self-assessment tax returns.

This phase will build on an existing MTD for income tax pilot that has been running since April 2017, through which several businesses and landlords have already met their income tax obligations entirely through MTD.

HMRC says it will work with software providers on a guide to software choices, including products that support both MTD for ITSA and MTD for VAT. Free options will also be available for the smallest businesses with straightforward affairs.

Getting ready for the new rules

Whether you’ve been filing your VAT returns digitally under MTD for the past year or you’re completely new to the scheme, we can help you to meet your obligations.

Our tax experts can get you set up with the HMRC-approved software of your choice, including Iris, Kashflow, Sage, Xero and QuickBooks.

Contact us for help preparing for MTD.