Making Tax Digital: key dates for digital accounting transition
The most thoroughgoing legislative reform of the UK’s tax system in a generation is already underway. Summed up in three deceptively humdrum words – ‘Making Tax Digital’ (or MTD) – it’s a reform that’s set to profoundly alter the way that self-employed individuals and businesses (large and small) compile and submit Corporation, Value-Added and Self Assessment Income Tax returns from now on. Its launch in the UK aims to effect a major transition away from error-prone, time-consuming (and often late) paper-based tax returns in favour of a wholly digitalised alternative – all of which is to say that the time to get ready for this reform is now.
Let’s take a look at what Making Tax Digital actually is, along with the already-unfolding timeline for this significant reform.
What is Making Tax Digital?
As noted above, Making Tax Digital is the embodiment of the UK HMRC’s goal of digitalising the British tax system. It will encompass Corporation Tax, VAT and Income Tax Self Assessment for both businesses and self-employed people. Businesses and individuals currently using spreadsheets will be required to use HMRC-recognised bridging software. For many, however, a more comprehensive (and affordable) solution can be found in the form of new cloud-based accounting software that automates bookkeeping and makes the compilation and submission of each of these taxes a breeze. The best providers offer this technology on a subscription basis, which is designed to be affordable even for the smallest businesses.
Once set up, it will completely digitise all financial bookkeeping data, including tax returns, keeping it all fully updated and visible in real time on any authorised connected device, regardless of the location. This sophisticated cloud-based software is fully compliant with HMRC requirements.
As HMRC explains on its website, the initiative is designed to substantially close the annual tax gap in the UK, which amounted to £8.5bn in 2018 and 2019 – despite taxpayers’ best intentions to submit accurate returns, many turn out to be inadvertently inaccurate.
HMRC states: “The improved accuracy that digital records provide, along with the help built into many software products and the fact that information is sent directly to HMRC from the digital records, avoiding transposition errors, will reduce the amount of tax lost to these avoidable errors.”
Errors do, however, also run in the opposite direction. For example, in 2021, UK corporations claimed back £11.5bn in overpaid Corporation Tax from the preceding year, a hike of 26% on 2020’s £9.1bn. As tax consultant David Hannah noted in response to these figures, the accuracy and streamlining delivered by digitising financial affairs is the solution to errors of both underpayment and overpayment.
As the initiative proceeds, accountants are urging micro and small business owners to move their finances online ahead of the full introduction of the scheme, which has been pushed back by HMRC to April 2024. This deferral has been arranged to grant small business owners and sole traders with annual incomes above £10,000 an additional year to make the transition to online accounting.
The key dates for the digital accounting transition
HMRC has phased the rollout of MTD, with several of its stages already implemented. Here is the timeline:
- April 2019: HMRC introduces MTD for all VAT-registered companies with a taxable turnover of £85,000. All businesses meeting this description were required to begin keeping digital records and submit returns to HMRC via MTD-compatible software.
- April 2021: Bridging software or ‘digital links’ becomes mandatory for VAT returns under the MTD rollout. Data transfers from this date onwards are required to be made between functionally compatible software (manual copying and pasting became impermissible).
- April 2022: All VAT-registered companies, irrespective of turnover, are required to register for, and be fully compliant with, MTD for VAT.
In addition, MTD for Income Tax Self Assessment (ITSA) for self-employed individuals is piloted.
- April 2024: MTD for ITSA becomes mandatory for all sole traders and landlords with an annual income exceeding £10,000. This will require MTD for ITSA-compatible software to maintain digital records. HMRC will also require quarterly updates of all company income and expenditure, plus an End of Period Statement (or EPOS) at the conclusion of the firm’s fourth quarter.
An annual ‘Final Declaration’ must also be submitted digitally by 31st January each year, detailing all other taxable income.
- April 2025: All general partnerships earning in excess of £10,000 must join MTD for Income Tax by the 6th of this month.
- April 2026: All businesses paying Corporation Tax are likely to be required to begin adhering to MTD rules in the tax year 2026, though this specific date remains unconfirmed at present.
As we noted in the opening paragraphs, from sole traders to corporations, the time to prepare for full compliance with Making Tax Digital is now.
