Making Tax Digital (MTD) is designed to simplify the tax process for business owners.
Part of HM Revenue & Customs’ (HMRC) aim of modernising tax payments, MTD is set to reduce non-compliance and inaccurate reporting of tax for businesses.
It requires business’ tax returns to be recorded and submitted digitally, with regular updates throughout the year.
However, the new initiative has created a number of challenges for business owners, leaving many unsure of where to go next.
For our clients, we’ve answered some of your burning questions to demystify current MTD requirements and upcoming changes.
Q: Do I need to use MTD for VAT?
A: As of February 2024, only VAT-registered businesses are required to use MTD.
If your business is VAT-registered, you should now be signed up for MTD and use a compatible software to keep digital records and file your VAT returns.
You’ll need to do this if your turnover exceeds the VAT threshold of £85,000. This applies whether your business is incorporated or unincorporated.
Unlike unincorporated businesses (sole traders and partnerships), limited companies are exempt from MTD for Income Tax Self-Assessment (ITSA) because you are a separate legal entity to your business.
Q: Does MTD impact limited companies beyond VAT?
A: Currently, limited companies are only required to record and file VAT returns through MTD.
However, they will eventually become subject to MTD for Corporation Tax.
This will mandate digital record-keeping and digital tax submissions for Corporation Tax, as opposed to the current system of annual reporting via a Corporation Tax return (CT600).
The Government has yet to confirm the implementation date for MTD for Corporation Tax, but you should remain aware of changing regulations in order to stay compliant.
Q: Are sole traders subject to MTD?
A: Not yet – but, if you’re a sole trader or part of a partnership, you will soon need to prepare to comply with MTD requirements, depending on your income level.
Starting April 2026, self-employed individuals and landlords with annual business or property income above £50,000 must report and pay income tax via ITSA for MTD.
This requirement will extend from April 2027 to those earning above £30,000 and will eventually include partnerships.
If you are a sole trader, you’ll need to assess your business income thresholds to determine your entry point into the MTD for ITSA scheme, especially as it will be reduced to only £30,000 in 2027.
Q: What counts as MTD-compatible software?
A: One of the core requirements of MTD is that businesses use a compatible software to record and submit tax returns.
MTD-compatible software must have certain functions, which include the ability to:
- Accurately maintain financial records
- Prepare and submit updates and year-end statements using the provided information
- Submit your declaration at year-end
- Send and receive communications between your business and HMRC
The shift towards MTD has the potential to create efficient tax-based workflows, so we would also recommend using this opportunity to review your working processes and introduce technology that fits your business.
Got another question? Get in touch with us to find out how to make MTD work for you.