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Making Tax Digital (MTD): A Guide for Taxpayers

Published by Susan Basnet
Posted Date: May 22, 2024 , Modified Date: May 21, 2024

Making Tax Digital (MTD) is an initiative by HM Revenue and Customs (HMRC) aimed at modernising the UK's tax system. From the mandatory digital record-keeping to the shift in tax return submissions, MTD is reshaping how businesses and individuals interact with the UK tax system.

This guide explores the fundamental elements of MTD, providing insights into its purpose and objectives and offering a detailed, step-by-step registration guide for both self-employed individuals and companies.

Understanding Making Tax Digital (MTD)

Under MTD, businesses, self-employed individuals, and landlords must maintain digital records of their income, expenses, and financial data using compatible accounting software or digital tools. These records must be regularly updated to provide real-time tax information. Implementation of MTD is mandatory for individuals with a total qualifying income above £50,000 from 6 April 2026.

A significant aspect of MTD is the obligation for businesses and individuals to digitally submit their tax returns and related information to HMRC using MTD-compatible software. This replaces the previous paper-based filing system and HMRC's online portal.

Background and Objectives

HM Revenue and Customs (HMRC) introduced MTD with several objectives, primarily focused on modernising and enhancing the efficiency of the UK tax system. Here are some key reasons behind the introduction of MTD:

Reducing Errors and Tax Gaps - MTD aims to improve accuracy by requiring digital record-keeping and real-time reporting, ensuring taxpayers report their income and expenses more reliably.

Streamlining Tax Administration - Digitalisation makes it easier for taxpayers to manage their tax affairs, reduces paperwork burden, and facilitates quicker processing of tax returns by HMRC.

Improving Efficiency and Productivity - MTD is expected to enhance the efficiency and productivity of both taxpayers and HMRC. HMRC can process tax returns more quickly and accurately, reallocating resources to areas of greater need.

Preparing for the Future: Embracing digital technologies through MTD helps taxpayers and HMRC adapt to the evolving landscape of tax administration, ensuring the UK tax system remains modern, resilient, and fit for purpose in the digital age.

Making Tax Digital (MTD) Registration

Making Tax Digital (MTD) Registration

While signing up for MTD is not compulsory for everyone at the moment, some individuals and companies may opt to do so voluntarily now. The MTD requirement depends on the property income of the individual and whether they fall under the MTD exemption. Following is the step-by-step guide to voluntarily sign up for MTD for self-employed individuals.

Check Whether You Can Use the MTD Service and When You Must Sign Up

For individuals registered for self-assessment and receiving income from self-employment property, or both, the implementation of Making Tax Digital (MTD) for Income Tax becomes mandatory from 6 April 2026, provided their total qualifying income (see FAQ section) exceeds £50,000.  

However, if the qualifying income falls below £50,000 but is above £30,000, individuals meeting other conditions are not obligated to adopt MTD for Income Tax until 6 April 2027.

Exemptions from Making Tax Digital (MTD)

Individuals with income below the £30,000 threshold are not mandated to sign up for MTD, but there is an option to sign up voluntarily. However, certain specific entities and individuals fall under the MTD exemption, making them unable to sign up for MTD. Exempt entities include:

  • Trustees
  • Individuals without a National Insurance Number
  • Personal representative of deceased individuals
  • Non-resident Companies

Although exempt from MTD registration, they must still report the income and gains in the Self Assessment Tax Return.

Get Compatible Software

After determining your eligibility for Making Tax Digital (MTD) and the registration deadline, the subsequent crucial step is selecting suitable software for your business. The chosen software should possess the following capabilities:

  • Maintaining business records in compliance with the MTD regulations
  • Preparing and dispatching quarterly updates to HMRC
  • Finalising your business income calculations and submitting declarations at the conclusion of the tax year
  • Facilitating digital communication with HMRC through their Application Programming Interface (API) platform

Sign Up As An Individual for Income tax

Once you have identified the right MTD-compatible software for your business or have already been using one, you can sign up for MTD through the software provider. As the sign-up process can be different for all software, you should contact your provider about the sign-up process.

Making tax Digital

It is worthwhile remembering that your business’s accounting period must align with the tax year i.e. from 6 April to 5 April.

Beyond that, you must have the following information to sign up for the MTD:

  • The date you started receiving property income or the start date of your business
  • The accounting method used i.e. cash basis or traditional (accrual) basis accounting
  • The name of your business and the address for self-employment income sources
  • The nature of your self-employment business

MTD for VAT-Registered Businesses

MTD has brought significant changes for businesses registered for VAT. It is now required for all VAT-registered businesses to maintain digital records and submit their VAT returns using compatible software. Businesses, including sole traders, limited companies, partnerships, and landlords with at least one UK property, are affected by MTD.

It should be noted HMRC will automatically sign up all VAT-registered businesses to Making Tax Digital for VAT unless they are exempt or have applied for exemption.

The next crucial step involves selecting suitable software that facilitates the direct submission of VAT returns to HMRC, eliminating the need for manual visits to HMRC's websites.

The available software options on HMRC's platform generally fall into two categories:

  • Record-keeping software, which updates and stores your records, enabling direct VAT return filing and
  • Bridging software designed to work with non-compatible tools like spreadsheets and accounting systems, ensuring the correct format when transmitting information to HMRC

Conclusion

As we navigate the realms of Making Tax Digital, it becomes evident that this initiative is more than just a modernisation effort. It's a strategic move to enhance accuracy, streamline administration, boost efficiency, and prepare for the future of tax management.

Whether you're a self-employed individual, a landlord, or a business owner, understanding and implementing MTD is essential for staying ahead in the evolving landscape of tax regulations. Embrace the digital transformation, simplify your tax obligations, and ensure your financial practices align with the progressive era of MTD.

Frequently Asked Questions

What are the MTD requirements for individuals with more than one business?

Individuals with multiple businesses must use MTD for each business (for example, if you are a landlord or a builder). This also means you must keep records and make separate submissions for each business.

It’s important for landlords to note that multiple businesses don’t mean multiple properties. For e.g., if you receive property income from multiple properties, all properties will be treated as one ‘UK property business’ if located in the UK and one ‘overseas property business’ if properties are outside of the UK.

Who can sign up voluntarily for MTD?

Individuals and companies following criteria can sign up voluntarily:

  • The details and tax records are kept up to date with HMRC,
  • They are UK residents and have a National Insurance number,
  • They are already registered for Self-Assessment and have submitted at least one tax return, with the accounting period from 6 April to 5 April, and
  • They have included either self-employment income, UK property income, or a foreign property income source in last return.

What is included in an individual’s Qualifying Income?

An Individual’s Qualifying income is the combination of income from self-employment and property income sources. These are counted towards your qualifying income before the deduction of any expenses.

However, the residence and domicile also affect an individual’s qualifying income. For e.g., if you are a resident or domiciled outside of the UK, your qualifying income would include only the income from UK self-employment and UK property. Foreign property income sources are excluded.

Need expert advice on MTD and property taxation?

Contact us today for efficient and hassle-free assistance.

Susan Basnet
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