All VAT-registered businesses now have to comply with Making Tax Digital (MTD) for VAT.
But when are the next stages of Making Tax Digital coming?
In this article, find out who needs to comply with MTD for VAT, MTD for Income Tax Self Assessment (also known as MTD for ITSA and MTD for Income Tax) and MTD for Corporation Tax.
We also look at their different thresholds so you can be ready for MTD in plenty of time.
Here’s what we cover in this article:
- Making Tax Digital thresholds
- Who Making Tax Digital applies to at present
- MTD for VAT: Threshold and exemptions
- MTD for Income Tax: Threshold and exemptions
- MTD for Corporation Tax: Threshold and exemptions
- MTD thresholds: Frequently asked questions
Making Tax Digital thresholds
Making Tax Digital is intended to streamline tax, improving accuracy and efficiency while making the whole process behind taxation easier to manage for taxpayers and the government.
HMRC says there have already been tangible benefits from MTD for those businesses who have adopted it.
But MTD is happening in phases and applies to different groups based on different thresholds.
Who Making Tax Digital applies to at present
The government is introducing Making Tax Digital in phases, so there are various MTD deadlines for businesses.
All VAT-registered businesses now need to file their VAT Returns under MTD rules.
From April 2024, MTD for ITSA comes into play.
It will mean sole traders and landlords will be required to file their income tax returns under the next phase of MTD if their income is over £10,000. MTD for ITSA will apply to general partnerships from 2025.
Then, in 2026 at the earliest, eligible firms may need to begin using MTD for Corporation Tax.
You can view a full MTD timeline at our MTD hub.
Making Tax Digital for VAT software
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MTD for VAT: Threshold and exemptions
MTD for VAT means keeping digital VAT records and adopting MTD-compatible software to provide your VAT returns to HMRC.
HMRC says MTD for VAT has already helped many businesses eliminate paper and manual processes, and reduce time spent on admin.
The process has generally made VAT Returns more accurate and easier to complete.
MTD for VAT threshold
VAT-registered businesses with a taxable turnover either below or above the £85,000 VAT threshold must follow MTD rules now.
MTD for VAT exemptions
HMRC says you can apply for an exemption from MTD for VAT if it’s not reasonable or practical for you to use computers, software or the internet.
Typically, this could be because of your age, disability, location or religion.
However, this is done on a case-by-case basis, and HMRC says it will consider any reason why you think it’s not reasonable or practical to adopt MTD.
In practice, you’ll likely need to have a pretty strong argument for HMRC to grant you an exemption.
What do I do if I am VAT registered but under the threshold?
If you’re VAT registered and under the current £85,000 threshold, you need to follow MTD rules for VAT—sign up on HMRC’s website.
If you don’t pay by direct debit, sign up at least three days before your return is due.
For those who already pay by direct debit, it’s best not to sign up too close to the date your return is due. You don’t want to end up paying twice.
If you’re a direct debit payer, HMRC advises that you shouldn’t sign up less than seven days before your return is due or five days after your return is due.
MTD for Income Tax: Threshold and exemptions
HMRC will apply a threshold to MTD for ITSA, with a go-live date of 6 April 2024 for sole traders and landlords, and 2025 for general partnerships.
It means sole traders, general partnerships and landlords with business or property income above £10,000 will need to adopt MTD for their income tax returns.
If you fall into one of these groups, as part of MTD, you’ll need to maintain digital records of your business income and spending.
MTD means you’ll need to send quarterly updates to HMRC using software that is functionally compatible with MTD.
In this way, HMRC will get an up-to-date picture of your earnings and costs.
The quarterly reports will be per business and will be drawn together with an End of Period Statement (EOPS) again per business. You will then be required to submit your final declaration which is per individual drawing together all your income, expenditure, adjustments, and allowances.
HMRC says trusts, estates, trustees of registered pension schemes and non-resident companies will be exempt from MTD for ITSA, at least from when it first comes into effect.
While general partnerships earning over the £10,000 threshold will move to MTD by April 2025, HMRC hasn’t said when it expects other types of partnerships will have to join MTD.
MTD for Corporation Tax: Threshold and exemptions
HMRC hasn’t proposed a minimum turnover threshold for MTD for Corporation Tax, and it’s not yet clear what kind of businesses will be included in that phase of Making Tax Digital.
While MTD for Corporation Tax is still some way off and in the planning stage, the government hopes to roll out a voluntary pilot for incorporated businesses in 2024, with a view to implementing MTD for corporation tax as a legal requirement by 2026 at the earliest.
It means incorporated businesses may eventually need to keep digital records detailing their income and spending through MTD compatible software, digital entries that will help create reports which will be sent to HMRC every three months.
These quarterly reports would also form the basis of firms’ annual corporation tax declarations.
MTD thresholds: Frequently asked questions
What is the threshold for Making Tax Digital?
All VAT-registered businesses must file their VAT Returns via MTD for VAT, regardless of their taxable turnover.
In addition, a £10,000 threshold will apply to sole traders, general partnerships and landlords – above this level, they will need to switch to MTD for declaring income tax from employment and rental income from 2024 (sole traders and landlords) and 2025 (general partnerships).
Who is exempt from Making Tax Digital?
HMRC says it will consider making exemptions from the requirement to follow MTD rules in exceptional circumstances.
For instance, your location may mean you can’t get internet access, or a disability might make it impractical to follow the rules of MTD.
What is included in turnover for the VAT threshold?
VAT taxable turnover is the total value of everything you sell that’s not exempt from VAT during a rolling 12-month period.
You should include the value of goods you hired or loaned to customers, business goods used for personal reasons, goods you bartered/part-exchanged or gifts, services you received from businesses in other countries that you had to ‘reverse charge’ and building work over £100,000 your business did for itself.
You should only exclude VAT-exempt sales and the value of goods or services you supply overseas.
Editor’s note: This article was first published in November 2021 and has been updated for relevance.
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