Making Tax Digital (MTD) is modernising tax returns, simplifying the process and making it easier to stay on top of your obligations.

We’ve all been there—drowning in a sea of paper receipts, spreadsheets that make your head spin, and tax returns that feel like they require a PhD to complete. Enter Making Tax Digital (MTD): the government’s push to take us out of the paper age and into the 21st century of tax reporting. Yes, you heard it right—tax filing has finally gone digital, and it’s not as scary as it sounds. In fact, it’s a whole lot easier than you might think.

Think Of Making Tax Digital As Taxation… Without The Stress

In simple terms, Making Tax Digital is the UK government’s plan to make businesses keep digital records and file tax returns online, without all the manual paperwork. It’s like switching from a fax machine to email—simple, faster, and way more efficient.

So, instead of sorting through piles of receipts and manually entering them into your tax returns, you’ll use software to track and submit your tax data. The whole idea? To make taxes simpler, more accurate, and (yes, dare we say it) less painful.

Are There Any Benefits to MTD?

• It makes it easier for you to get your taxes right the first time.
• You can seamlessly link tax management with other business processes using software.
• It encourages businesses to go digital, boosting productivity across the board.

The best part? It helps reduce tax losses from avoidable mistakes by:

• Improving the accuracy of digital records.
• Offering extra support built into many software products.
• Sending digital records straight to HMRC, cutting down on errors.

Read more on the benefits of MTD:
Evidence of Making Tax Digital reducing the tax gap.
How businesses have benefitted first-hand from Making Tax Digital.

When Did This All Start (And Why Should You Care)?

This didn’t happen overnight. Here’s a quick timeline of how Making Tax Digital has evolved:

• April 2019: The launch of MTD for VAT-registered businesses with taxable turnover over £85,000.
• April 2024: The expansion to include income tax self-assessments. That’s right, MTD will soon be mandatory for most self-employed individuals, landlords, and small businesses.

If you’re one of these, you’ll need to get on board by the deadlines. Procrastination won’t work this time—unless you enjoy last-minute panic.

Read more: Understanding the new R&D tax credit rules

Who Needs To Get On The Bandwagon?

Here’s the truth: Making Tax Digital isn’t just for massive corporations. If your business is VAT-registered and has a turnover above £85,000, you’ve already had to comply. But it’s not stopping there. MTD will soon apply to self-employed individuals and landlords too. If you fall into this category, you’ll need to get up to speed or risk facing penalties (spoiler alert: it’s not pretty).

You’ll need to follow the requirements for MTD for Income Tax if you are self-employed or a landlord from:

• 6 April 2026 if you have an annual business or property income of more than £50,000
• April 2027 if you have an annual business or property income of more than £30,000

If you’re a small business owner or freelancer thinking you can slip under the radar, think again. The government isn’t looking the other way anymore. If you’re still using paper records, you’ve got a deadline to meet!

The Nuts and Bolts of MTD (We Promise It’s Not Too Boring)

Alright, now you’re probably thinking, “This sounds complicated.” Trust us, it’s really not. Here’s how Making Tax Digital works:

1. Use compatible software: No more scribbling on paper or relying on Excel spreadsheets. You’ll need to use MTD-compatible software to keep track of your income and expenses.
2. Submit returns digitally: You’ll send your tax data directly to HMRC—no more mailing in paper forms or filing by hand.
3. Stay on top of your records: The beauty of MTD is that you’ll always know where you stand with your taxes. Digital records mean no more last-minute scrambles.

It’s like moving from a clunky, old laptop to a sleek, fast new machine. Once you get the hang of it, you’ll wonder why you didn’t make the switch sooner.

What Happens If You Don’t Comply With MTD?

We get it. The idea of adding another task to your already jam-packed to-do list sounds less than appealing. But trust us—ignoring Making Tax Digital could cost you. HMRC is serious about enforcing the new rules, and non-compliance could lead to penalties. Think of it as forgetting to charge your phone—it doesn’t end well.

Since April 2024, everyone who joined MTD for ITSA has been subject to the government’s reformed penalty system for late payments and late submissions. This updated penalty regime is designed to be simpler and fairer than the previous one. It focuses on penalising those who consistently miss deadlines, while offering more leniency to those who only occasionally fail to meet their obligations.

Let’s Address The Elephant In The Room

Late Submission Penalties
From January 2023 for VAT and April 2024 for Income Tax, a points-based penalty system will apply. Each missed deadline results in a point, with separate points for VAT and Income Tax. Once a taxpayer reaches the threshold—two points for annual submissions, four for quarterly, and five for monthly—a £200 penalty is charged. Points expire after 24 months, provided the taxpayer stays under the threshold. Further penalties are applied for repeated late submissions. However, if there’s a reasonable excuse for missing a deadline, no penalty will be charged, and taxpayers can appeal points and penalties.

Late Payment Penalties
Late payments will incur a 2% penalty after 30 days, rising to 4% after 30 days. A second penalty of 4% per year will apply from day 31, accruing daily. If the taxpayer arranges a Time to Pay agreement, penalties stop. As with late submissions, reasonable excuses can prevent penalties, and taxpayers have the right to appeal.

Implementation
The new penalty rules apply to VAT from January 2023 and to Income Tax from April 2024. For those volunteering to test Making Tax Digital for Income Tax Self-Assessment (MTD for ITSA), penalties won’t be charged during the testing phase. The rules apply to self-employed and property owners with income over £50,000 from the 2026/27 tax year and over £30,000 from April 2027. HMRC will take a ‘light touch’ approach to penalties during the first year.

Interest Harmonisation
VAT late payment interest now follows the same rules as Income Tax. Interest is charged from the payment due date until HMRC receives payment, and HMRC will pay interest on overpaid tax or refunds.

Don’t Worry, We’ve Got Your Back

Here’s the good news: You don’t have to navigate this new tax frontier on your own. We’re here to make the transition as painless as possible. Your Digital Accountants can help you choose the right software, guide you through the digital filing process, and ensure everything is compliant. No more stress, no more paper cuts. Contact us today to arrange a phone consultation or pop in to our office for a coffee and a chat!

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Answering Frequently Asked Questions About MTD

What is Making Tax Digital (MTD)?
MTD is a UK government initiative designed to modernise the tax system, making it easier for individuals and businesses to manage your tax affairs digitally, reduce errors, and streamline the process.

Who needs to comply with MTD?
MTD applies to VAT-registered businesses, self-employed individuals, and property owners with income over £50,000. It will expand to include those with income over £30,000 and more taxpayers under Income Tax Self-Assessment (ITSA) by 2027.

When does MTD start for VAT?
MTD for VAT applies to businesses from 1 January 2023, requiring them to keep digital records and submit VAT returns through MTD-compatible software.

When will MTD apply to Income Tax?
MTD for Income Tax will apply to businesses and property owners with annual income over £50,000 from the 2026/27 tax year. MTD for ITSA testing begins in April 2024.

What software do I need for MTD?
To comply with MTD, businesses must use MTD-compatible software to keep digital records and submit returns. Many accounting software providers offer MTD-ready solutions.

Will I face penalties under MTD?
Yes, there are penalties for late submissions and payments. The penalty system is points-based for late submissions and percentage-based for late payments. However, reasonable excuses can prevent penalties.

How do the new penalties work?
A points-based system means you incur points for each missed deadline. Once you hit a threshold (e.g., 2 points for annual submissions), a £200 penalty is charged. For late payments, penalties start at 2% and increase if payments are further delayed.

Can I appeal MTD penalties?
Yes, you can appeal MTD penalties if you have a reasonable excuse, such as illness or technical issues. HMRC has an appeal process for both late submission and late payment penalties.

Do I need to keep paper records?
Under MTD, businesses must keep digital records and submit returns digitally. Paper records are no longer sufficient for tax compliance under MTD, though you may still maintain paper records for your own use.

What happens if I don’t comply with MTD?
If you don’t comply, you may face penalties and interest on overdue payments. Additionally, not complying could lead to an inaccurate tax return, increasing the risk of errors and potential audits. It’s important to transition to MTD-compliant systems as soon as possible to avoid these issues.

 

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