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 when the journey towards implementation has not proceeded entirely as planned. A recent report from the National Audit Office entitled “Progress with Making Tax Digital” raised various concerns as to the way things have proceeded so far and made various suggestions as to how HMRC might redirect 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.
HMRC’s initial assessments indicate that MTD for VAT has led to some reduction in the tax gap (albeit the numbers do appear relatively small).

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 electronically and then submitted electronically to HMRC by way of “quarterly updates” and “end-of-period statements”. Further information as to how the regime is intended to operate can be found here.

MTD for ITSA is currently 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 currently reviewing its plans for individual sole traders and landlords with annual income below £30,000. It is also still due to confirm when partnerships and LLPs will be brought into the regime.

A pilot for MTD for ITSA is in operation, although this is currently very limited in scope and has been temporarily paused for new entrants. Before MTD for ITSA can be successfully implemented, some technical queries need to be resolved, and the pilot will need to be expanded significantly to prove that the system is effective.

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 doing to MTD to ITSA – which may increase further depending on the extent to which HMRC takes on board the recommendations in the National Audit Office report referred to above – this is likely to be some way off.

Making Tax Digital is only one part of HMRC’s modernisation and digitalisation agenda. HMRC is seeking to make other changes as part of its ten-year strategy to build a trusted and modern tax administration. As part of this, the government launched a consultation on Tax Administration and Maintenance Day 2023 on how its information and data collection powers can be reformed to better enable digital transformation and compliance activities.

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.