What's next for Making Tax Digital?

The saga of HMRC's Making Tax Digital (MTD) initiative continues with the news of further delays to the introduction of Making Tax Digital for income tax self assessment (MTD for ITSA). As well as a two-year postponement the government has altered the terms of the self assessment stage of MTD, and a review means further changes could be in the pipeline. However, MTD for VAT (MTDfV) already applies to all VAT-registered businesses. Here we take a look at what we know about MTD so far.

Delay to MTD for ITSA

The mandation of MTD for ITSA will now be introduced from April 2026, with businesses, self-employed individuals and landlords with income over £50,000 mandated to join first, an apparent change from the current £10,000 limit.

Those with income over £30,000 will be mandated from April 2027.

The government will also review the needs of smaller businesses and look in detail at whether the MTD for ITSA service can be shaped to meet the needs of smaller businesses.

Following the new approach, the government will not extend MTD for ITSA to general partnerships in 2025.

How does MTD apply?

HMRC research suggests many people are unsure which developments apply to them. So, what are the rules on records and software?

MTD involves keeping and preserving specific accounting records in a prescribed digital format and transmitting information to HMRC digitally. It does not mean having to scan and store receipts and invoices digitally, as originally envisaged.

MTD rules require what is called functional compatible software for record keeping purposes. To make submissions to HMRC, the software is linked with HMRC systems, and there is a specific authorisation process at the outset (and every 18 months afterwards) to do this.

The rules require an uninterrupted digital journey to HMRC, information flowing from the accounting records to the digital filing, without manual input.

Spreadsheets can form a component part of digital record keeping, provided that the product that consolidates records or summary records from the spreadsheet is digital.

MTDfV so far

All VAT-registered businesses should now be using MTDfV, whether businesses with taxable turnover over the VAT registration threshold of £85,000, or those operating under this level. 

From 1 November 2022, the online VAT return facility will close. For businesses filing annual VAT returns, the last date to file the old way is 15 May 2023.

Appropriate software

Appropriate functional compatible software must be used for all business income and expenses. For retail sales, digital records mean a single digital record of the daily gross takings.

The penalty regime

New penalty rules are being introduced for late submission and late payment. They apply initially to VAT, for VAT periods beginning on or after 1 January 2023. The essence of the change is that instead of an automatic financial penalty for failure to submit on time, penalty points accrue. When a particular points threshold is reached, a penalty arises.