Making Tax Digital: Where are we now?

Making Tax Digital (MTD) is a key part of the government’s plan to modernise and digitalise the UK’s tax system. It is intended to ensure businesses keep digital records and submit data directly to HMRC from those records, reducing the risk of errors and narrowing the “tax gap”.

MTD was first announced by the government in 2015, since which time the journey towards implementation has not proceeded entirely as planned. A recent report from the House of Commons Public Accounts Committee commented that HMRC had “completely underestimated the scale of the challenge of digitalising the tax system” and made various recommendations to HMRC as it continues with the project.

So where are we now?

MTD for VAT

MTD for VAT is now in place for all VAT-registered businesses. The old online VAT filing portal was closed on 15 May 2023, meaning that all VAT returns now need to be submitted to HMRC through
MTD-compatible software.

A new VAT penalty and interest regime, which is considered more appropriately aligned to the MTD payment and reporting obligations, is now in place.

MTD for income tax self-assessment (MTD for ITSA)

MTD for ITSA will entail a requirement for financial information that is relevant to the income tax position of unincorporated traders and landlords to be maintained digitally and then submitted electronically to HMRC by way of “quarterly updates”. The government has recently clarified that these quarterly updates will provide information on a cumulative basis throughout the tax year (which will simplify the position where corrections are needed to previously submitted figures).

It had previously been announced that, following the end of the tax year, an End of Period Statement would need to be submitted to report the final taxable profit for the year for a particular income source, and in addition a final declaration would then be required to present the taxpayer’s overall position for the year. The government has now removed the requirement to submit an End of Period Statement, meaning the final position for the tax year will simply be dealt with by way of the final declaration (which will be equivalent to the current income tax return).

MTD for ITSA is now due to be implemented as follows:

• from 6 April 2026 for individual sole traders and landlords with annual income exceeding £50,000;
• from 6 April 2027 for individual sole traders and landlords with annual income between £30,000 and £50,000.

The government is not currently planning to mandate MTD for ITSA for individual sole traders and landlords with annual income below £30,000, but it has said that it will keep this under review. The government has also recently announced several helpful exemptions and relaxations, including some relating to landlords with jointly owned property (who will not now need to compute and report their individual shares of income and expenses each quarter).

The government has said that it is committed to introducing MTD for ITSA to partnerships, although it has not yet announced when it plans to do this.

A pilot for MTD for ITSA is in operation, although this is currently very limited in scope and now needs to be expanded significantly in order to properly test the system before MTD for ITSA starts to become mandatory.

Other developments

As far as we are aware, HMRC is still committed to extending MTD to corporation tax. However, given the work that still needs to be done as far as MTD to ITSA is concerned, this is likely to be some way off.

If you would like any further guidance on how your tax compliance obligations are changing under MTD, or if you need any assistance in implementing digital accounting systems that will both meet your needs and allow you to meet your expected new obligations, please get in touch.