Wondering what Making Tax Digital is and how it will impact your business? We’ve put together a list of frequently asked questions along with answers to help you understand everything you need to know about MTD.
If you have any other questions or would like to learn more, leave us a comment below and we will answer as soon as possible.
What is Making Tax Digital?
Making Tax Digital (MTD) is an HMRC initiative that aims to make the process of filing and processing tax returns easier. It will impact the way businesses pay their taxes and the way the government processes tax returns. The new rules will affect VAT returns, Income Tax Self Assessment and Corporation Tax. MTD requires VAT-registered businesses and individuals to keep digital records and submit tax returns using compatible software.
How will Making Tax Digital benefit my business?
MTD could be a good opportunity for your business. As you will be keeping records and filing taxes digitally, it will give you the chance to check your income, expenses and profit on a regular basis and this can help you make informed decisions. You’ll have a clear view of your tax obligations and access to your tax information online from anywhere.
What is Making Tax Digital for VAT?
To put it simply, Making Tax Digital for VAT, also known as MTD for VAT, is the process of bringing the VAT system into the digital age.
In order to be compliant with Making Tax Digital for VAT, businesses must fully comply with the MTD rules. From April 2022, all VAT-registered businesses are required to use MTD for their VAT returns. This means, using compatible software like Powered Now to keep digital records and submit VAT statements to HMRC. Make sure you've got the right software for your business.
The new system means that businesses must keep digital records. Keeping digital records allows them to calculate VAT liabilities and summarise them for VAT returns. If you're not sure how to begin, you can consult the MTD website for more information.
What do I need to do to be ready to sign up for Making Tax Digital for VAT?
Choosing software that is compatible with Making Tax Digital is critical to ensuring compliance with the new regulations because you will need it to submit your VAT Return. You will also need a Government Gateway User ID and password (if you don't have one, you can create one when you sign up).
Powered Now, for example, is cloud-based software that allows users to manage accounts from any device. With Powered Now you can create invoices, quotes, expenses, purchase orders and submit your VAT directly to HMRC, keeping on top of your numbers with ease.
You can find more information on how to sign up for Making Tax Digital here.
What records need to be kept digitally for Making Tax Digital for VAT?
You need to keep the following records digitally:
- your business name, address, VAT registration number and any VAT accounting schemes you use
- the VAT on goods and services you supply and receive and the rate of VAT charged on goods and services you supply
- your total daily gross takings if you use a retail scheme
- items you can reclaim VAT on if you use the Flat Rate Scheme
You also need to keep digital copies of documents that cover multiple transactions made on behalf of your business by:
- volunteers for charity fundraising
- a third party business
- employees for expenses in petty cash
You don’t need to scan paper records like invoices or receipts but you need to add all your transactions to your digital records. Find all the details here.
What is MTD compatible software?
MTD compatible software is software that allows you to keep digital records and submit VAT Returns without needing to visit HMRC’s website. HMRC has recognised a number of compatible software apps like Powered Now that you can use for Making Tax Digital for VAT.
Have you tried Powered Now? Book a free demo today!
What happens if my business doesn’t comply with Making Tax Digital?
There will be a new penalty system for those who don’t comply with Making Tax Digital (MTD). The new Making Tax Digital penalty points system will come into effect in January 2023. This will apply to those who regularly make mistakes and/or miss deadlines. They will earn points and at a certain threshold of points, a financial penalty of £200 will be applied.
- Annual: 2 points
- Quarterly: 4 points
- Monthly: 5 points
When did MTD for VAT start?
Making Tax Digital for VAT started in April 2019 with taxable turnover above the VAT threshold and it extended to all VAT-registered businesses in April 2022. It will extend to sole traders with sales of more than £50,000 in April 2026.
Who is exempt from MTD for VAT?
There are various reasons for exemption from MTD. These reasons include age, disability, remote location, religious grounds. You can also be exempt if you can’t use computers and if your business is subject to an insolvency procedure. However, it is worth noting that very few businesses have qualified for exemption to date.
Do I need to register for MTD for VAT?
All VAT- registered businesses and organisations, unless exempt, must follow MTD rules for their first return starting on or after April 2022. MTD for VAT is mandatory in the UK.
How do I register for MTD for VAT?
To register for MTD, you must log in to Government Gateway with your email address and activate the MTD functionality in your software. Once you've successfully registered, you must inform HMRC of the MTD software that you use. You must also ensure that you've installed the MTD software before you file your VAT return. You’ll also need your VAT registration number and the latest VAT return.
Can businesses below the vat threshold sign up for MTD?
From April 2022 onwards, there’s a need to comply with HMRC’s Making Tax Digital if you are a VAT-registered business. This includes VAT voluntary registered businesses.
Is MTD only for VAT?
No, MTD for VAT was launched in April 2019 but in April 2026 it will extend to MTD for ITSA (income tax self-assessment) for sole traders and landlords with gross income over £50,000. MTD for Corporation Tax will come into effect at some point later.
What is Making Tax Digital for Income Tax Self-Assessment?
Making Tax Digital for Income Tax Self-Assessment, also known as MTD for ITSA, is the UK government’s programme that requires individuals and businesses to keep their accounting records electronically using compatible software and file quarterly returns to HMRC with details of their income and expenditure together with any other information that is specified by HMRC.
In April 2026, MTD for ITSA will be mandatory for all self-employed people and landlords with sales over £50,000 per year and in 2027 for those with sales over £30,000 per year.
Under MTD for ITSA, all businesses will have to provide quarterly updates and the deadlines for quarterly returns under MTD for ITSA will be:
- August 5 for the period from April 6 to July 5
- November 5 for the period from July 6 to October 5
- February 5 for the period from October 6 to January 5
- May 5 for the period from January 6 to April 5
Who is exempt from MTD for ITSA?
There are some exemptions from MTD for ITSA, these include:
- Non-resident companies
- Trustees, executors and administrators
- Foreign businesses of non-UK domiciled individuals
When should you start preparing for MTD for ITSA?
MTD for ITSA starts on 6th April 2026.
Here's how to get started:
MTD for ITSA will require you to keep digital records of your business's income and expenses, including property income. This means that you'll need software that's compatible with MTD and you need to use this to submit these digital records to HMRC. Make sure you do your research and find compatible software that suits your business needs.
The deadline for actually submitting your final tax return is the 31st of January of the following year. You'll have until midnight on the same day to make your final declaration and pay your tax. You should also prepare any staff that you may have for the change. And there's no need to stress about it, just get started as soon as possible.
How should I work with my accountant?
The critical thing in determining the way to address MTD is to start with the way that you currently work with your accountant (if at all) and how you want to work in the future.
There are broadly two ways of working:
- You submit your own returns to HMRC.
- You pass information to your accountant and they do the returns for you.