There’s quite a lot of misinformation about Making Tax Digital (MTD).
Essentially, it’s the government’s plan to digitalise taxes.
For businesses, this started back in April 2019, with the introduction of Making Tax Digital for VAT.
This meant VAT-registered businesses over the £85,000 threshold must use software for their VAT accounting, and keep their VAT accounting records digitally.
In April 2024, Making Tax Digital (MTD) is expanded to income tax, and will affect millions of sole traders and landlords with incomes above £10,000.
The benefits for businesses of MTD are clear: accounting is revolutionised, with a much-clearer view of cash flow and tax liabilities. This empowers business owners and managers to make better decisions and to target growth.
Below, we list nine incorrect assumptions about MTD. Have a read and see how much you know—or not…
Here’s what we cover:
1. It’s about going 100% digital with all your accounting
Going entirely digital with your accounting is best practice. It reduces admin for you, and frees you up to spend more time doing what you love.
But it’s not to say Making Tax Digital requires 100% digitalisation of your accounting.
The rules are sometimes complicated and should be consulted, but often it’s entirely possible to continue to use paper-based invoicing, for example.
You just need to ensure the details are transferred into your accounting as soon as possible (or ideally use your accounting software to issue the invoices in the first place, so the data is already there).
And for all those times when paper can’t be avoided—when you receive a receipt after purchasing something, for example—then again you should aim to get the data into your accounting as soon as possible.
In fact, using an app such as AutoEntry means you can automate this right there and then using your mobile phone’s camera, without having to worry about it later.
2. HMRC wants to see all of your accounting data
It’s not unnatural to see Making Tax Digital as an attempt by HMRC to see more of your accounting data.
But the reality is that, so far at least, HMRC hasn’t required businesses to hand over any more data than it has previously.
MTD for VAT means you still need to submit nothing more than the same nine boxes of information for your VAT Return, for example. You just have to do it digitally, and keep digital records.
What is changing with MTD for Income Tax is that you need to let HMRC see the data more frequently.
You must make periodic updates at least quarterly for each business you operate.
Although the periodic updates don’t need to be accurate, the goal is to let everybody have a better idea of the tax position—including you.
This means you have a more intimate understanding of your cash flow, so can plan better.
3. With Making Tax Digital, you’ll pay more tax
HMRC says a key driver behind Making Tax Digital is to close the tax gap—the avoidable errors and fraud that mean billions of pounds of tax isn’t paid every year.
But if you’ve been completing your tax returns correctly then MTD shouldn’t mean you pay any more (or less) tax than you would if MTD hadn’t been introduced.
MTD is just a different (and better) way of calculating and reporting the same old taxes we’ve been doing for years.
4. If I use an accountant, I can forget about Making Tax Digital
You can continue to ask an accountant to prepare your books if you use Making Tax Digital. But this definitely doesn’t mean you can forget about MTD’s requirements.
You still need to switch to software for your relevant accounting, and keep your records digitally too.
It’s the need to keep your accounting records digitally that catches out those who don’t do their own accounting.
And it leads directly back to the first requirement—you’ll need to use some kind of software for your accounting record-keeping, even if you’ve decided that bookkeeping isn’t something you want to deal with.
The great news is that this can be as simple as using a handful of apps on your mobile phone.
You can digitalise the information from receipts, invoices, bills and other paperwork, and you can link an accounting app to your banking so you can always see your cash flow, and issue invoices electronically.
Speak to your accountant, if you have one, about the best way forward.
5. MTD for VAT doesn’t affect me because I’m only voluntary registered
This was certainly the case back in April 2019, when MTD for VAT was first introduced.
But it’s no longer the case as of April 2022.
At that point, MTD for VAT is extended to every business that’s registered for VAT—including those that have done so voluntarily.
In other words, all VAT-registered businesses will need to use software for their accounting, and digitally keep their accounting records relating to VAT.
This will be the case for the first full VAT accounting period that begins after 1 April 2022.
6. I don’t run a business, so Making Tax Digital doesn’t affect me
This is one of the trickier gotchas that catches out many people.
For example, somebody who rents out a single property might not consider themselves to be running a business. After all, it might demand very little of their time across the year.
Or somebody who has a side hustle doing freelance work, but otherwise works a full-time job through which tax is paid via PAYE, might not consider themselves to be running a business.
But they are indeed doing so as HMRC is concerned. Therefore, the rules of MTD may apply to them.
Every landlord with a rental income above £10,000 will need to follow the MTD for Income Tax rules as of April 2024, for example.
If the freelancer mentioned earlier earns more than £10,000 outside of their day job, they too will need to follow the rules for MTD for Income Tax and stop using Self Assessment for declaring that income.
And it goes without saying that if any individual is registered for VAT, they too must register for MTD for VAT.
For example, somebody with a hobby selling items online who has registered for VAT is considered to be running a business and therefore would be included in the scope of MTD for VAT (and perhaps MTD for Income Tax).
7. I checked thoroughly. I’m not affected by Making Tax Digital. So that’s the end of the story… right?
It might be, but there are other things related to the introduction of MTD that might affect you if you’re a sole trader or registered for VAT.
Basis period reform
This transition will take place across 2023/24, and could affect any sole trader or unincorporated business, regardless of whether MTD for VAT or MTD for Income Tax applies to them or not.
Here’s why: all businesses have accounting dates at which point they draw up their accounts.
The 12 months prior to this is known as the basis period.
For many sole traders, the accounting date and basis period match the tax year.
In other words, the basis period runs from 6 April to 5 April the next year.
However, it’s possible to have accounting dates and a basis period that doesn’t match the tax year (e.g. 1 January to 31 December).
To make life easier for those who enrol for MTD for Income Tax, HMRC is introducing basis period reforms that will mean all non-incorporated businesses such as sole traders must switch to using the tax year for their basis period, and use 5 April for their taxable date.
New points-based penalties
As of April 2022, a new points-based penalty system applies to late submissions.
Instead of instant fines, businesses will incur points. And once the points reach a given threshold, a fine will automatically apply.
Initially, only MTD for VAT is affected but when MTD for Income Tax begins in April 2024, the new points system will apply there too.
Then as of April 2025, it will apply to all Self Assessment submissions too, even though this is outside the scope of MTD.
8. Making Tax Digital means I no longer need to submit a tax return
This is mostly false.
If you have to follow the MTD for VAT rules, for example, then you’ll still need to submit your VAT Returns. It’s just that this must now be done digitally, via software.
It’s true that MTD for Income Tax means there will no longer be any need to submit a Self Assessment tax return (the SA100).
But this is effectively replaced with the yearly final declaration, in which you crystalise and sign off your income and expenditure to calculate your tax and National Insurance payment.
As with Self Assessment tax returns, HMRC will review this.
We don’t know much for certain yet about the rules of MTD for Corporation Tax. But it seems this will again retain the Corporation Tax Return—but will require it to be submitted digitally.
9. Small businesses don’t need to bother with Making Tax Digital
This is mostly false, but there is some truth to it when it comes to MTD for Income Tax.
First, it’s important to note that MTD for VAT applies to any business registered for VAT as of April 2022. Turnover doesn’t matter. So, it affects the smallest VAT registered business all the way up to the largest corporation.
However, upon its launch in April 2024, MTD for Income Tax will only affect those whose income is over £10,000. And then, in April 2025, it will only affect general partnerships that have income over £10,000.
Those individuals or general partnerships with earnings below £10,000 will continue to use the Self Assessment system, just like they always have done.
Is it possible MTD will be expanded to partnerships, sole traders or landlords with income below £10,000?
It’s perhaps likely, but HMRC hasn’t made any announcement about it yet.
Final thoughts on Making Tax Digital
Making Tax Digital isn’t complicated but there is a requirement to know the rules if it affects you.
Hopefully, some of the answers above should’ve dispelled the pervasive myths that have arisen around Making Tax Digital.
Getting your taxes right is made easier by MTD, and as such getting a clear understanding of the new rules is a good step towards running your business more smoothly, reducing admin and doing more of what you love.
A guide to Making Tax Digital for VAT
Need help to get your business ready for Making Tax Digital? Download this free guide - and bonus checklist - to learn about MTD for VAT and get prepared now for changes that start from April 2022.
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