The UK government’s Making Tax Digital (MTD) initiative is transforming the way businesses manage and submit their taxes. The scheme aims to simplify tax reporting, reduce errors, and make compliance more efficient through digital solutions. If your company is subject to MTD, it’s essential to understand the requirements and how to ensure compliance.
What is Making Tax Digital?
Making Tax Digital (MTD) is a government-led initiative designed to modernise the UK tax system by requiring businesses to keep digital records and submit tax returns using compatible software. The objective is to reduce errors caused by manual processes and improve tax administration efficiency.
MTD was first introduced for VAT-registered businesses above the £85,000 threshold in April 2019. However, the scope has since expanded, and more businesses are now required to comply.
Who Needs to Comply with MTD?
Currently, MTD applies to:
VAT-registered businesses (including limited companies, partnerships, and sole traders) with taxable turnover above the £85,000 threshold. Compliance has been mandatory since April 2019.
All VAT-registered businesses, regardless of turnover, since April 2022.
Income Tax Self-Assessment (MTD for ITSA) will apply from April 2026 for self-employed individuals and landlords with an income over £50,000, with those earning over £30,000 joining in 2027.
MTD for Corporation Tax is expected to be introduced no earlier than April 2026, with a pilot scheme expected beforehand.
How to Comply with MTD
To meet MTD requirements, businesses must:
Keep Digital Records: Maintain accurate and up-to-date records of income and expenses in a digital format. This means using compatible software rather than spreadsheets or paper records.
Use MTD-Compatible Software: Your accounting system must be able to send returns directly to HMRC. Examples include Xero, QuickBooks or FreeAgent.
Submit Tax Returns Digitally: MTD requires VAT returns to be filed online using approved software.
Integrate with HMRC Systems: Businesses must ensure that their chosen software can communicate with HMRC’s digital tax system.
What are the Benefits of MTD?
While MTD introduces new compliance requirements, it also offers several advantages:
Reduces Errors: Automation and digital record-keeping minimise mistakes caused by manual calculations.
Saves Time: Digital submissions streamline the tax reporting process, freeing up time for other business activities.
Improves Financial Control: Real-time tracking of income and expenses helps businesses manage cash flow more effectively.
Enhances Compliance: By ensuring accurate and timely submissions, businesses can avoid penalties for late or incorrect filings.
Steps to Prepare for MTD
If your company has not yet transitioned to MTD, here’s how to get started:
Assess Your Current Accounting System: Ensure your existing software is MTD-compatible or consider switching to one that is.
Digitise Your Records: Start keeping all financial records in a digital format.
Register for MTD with HMRC: If your business falls under the MTD requirements, you must sign up via the government’s website.
Train Your Team: Ensure that staff responsible for tax compliance understand the new system and how to use the software.
Seek Professional Advice: If you’re unsure how MTD affects your business, consult with an accountant or tax adviser.
Conclusion
Making Tax Digital is an important shift in the UK’s tax system, aimed at improving efficiency and accuracy. Companies that adopt digital record-keeping and MTD-compliant software will not only meet legal requirements but also benefit from better financial management.
If you need support in transitioning to MTD, Tyne Valley Accountants can help. We specialise in helping small businesses remain compliant. Get in touch to learn more about how we can support you.
Need help with MTD compliance? Contact us today for expert guidance tailored to your business needs.