Making Tax Digital (MTD) Update

CATEGORY: Legislation Update | Posted: November 2024 | Updated: November 2024

Everything you need to know about Making Tax Digital compliance, who's affected, and how to get your business ready for digital record-keeping.

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⚠️ IMPORTANT UPDATE:

Making Tax Digital for Income Tax Self-Assessment has been delayed. The latest timeline:

• April 2026: Mandatory for self-employed and landlords with income over £50,000

• April 2027: Mandatory for those with income over £30,000

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However, MTD for VAT is already mandatory for most VAT-registered businesses.

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WHAT IS MAKING TAX DIGITAL?

Making Tax Digital (MTD) is HMRC's initiative to modernize the UK tax system by requiring businesses to:

1. Keep digital records of income and expenses

2. Use compatible software to maintain these records

3. Submit tax information to HMRC digitally through software

4. File quarterly updates (for some taxes)

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The Goal

HMRC wants to eliminate errors in tax returns, reduce fraud, and make tax administration more efficient. Digital record-keeping is more accurate than manual bookkeeping and reduces mistakes.

What This Means for You

You can no longer use spreadsheets, paper records, or manual entry to file certain tax returns. You must use MTD-compatible software that links directly to HMRC's systems.

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WHO NEEDS TO COMPLY WITH MTD?

MTD for VAT (Already Mandatory)

If you're VAT-registered, you're already required to use MTD-compatible software to submit your VAT returns.

• Since April 2019: All VAT-registered businesses with turnover above £85,000

• Since April 2022: ALL VAT-registered businesses, regardless of turnover

Exemptions:

• Businesses using the VAT flat rate scheme for farmers

• Some charities and not-for-profit organizations

• Businesses where it's not reasonably practicable to use digital tools

MTD for Income Tax Self-Assessment (Coming Soon)

• From April 2026: Self-employed individuals and landlords with qualifying income over £50,000

• From April 2027: Self-employed individuals and landlords with qualifying income over £30,000

"Qualifying income" means business profits from self-employment or property income from UK or overseas property.

Note: This only applies to individuals, not companies. Limited companies already file digitally through Corporation Tax online filing.

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WHAT ARE THE REQUIREMENTS?

Digital Record-Keeping

You must keep digital records of:

• All sales and income

• All business expenses

• VAT charged and paid (if VAT-registered)

• Assets and liabilities

• Grants and subsidies received

These records must be kept in MTD-compatible software. Spreadsheets alone don't count unless they're linked to MTD software through bridging software.

Quarterly Updates (For MTD Income Tax)

When MTD for Income Tax becomes mandatory, you'll need to submit quarterly updates to HMRC showing income and expenses for each quarter.

The four quarterly deadlines:

• Quarter 1 (6 Apr - 5 Jul): Due 5 August

• Quarter 2 (6 Jul - 5 Oct): Due 5 November

• Quarter 3 (6 Oct - 5 Jan): Due 5 February

• Quarter 4 (6 Jan - 5 Apr): Due 5 May

End of Year Declaration

After your quarterly updates, you'll still need to submit a final declaration and pay any tax owed by 31 January (same as current self-assessment deadline).

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MTD-COMPATIBLE SOFTWARE OPTIONS

HMRC maintains a list of approved software. Popular options include:

Premium Solutions:

- Xero (£12-£35/month): Full-featured, excellent for growing businesses

- Sage (£12-£30/month): Trusted UK brand, comprehensive features

- QuickBooks (£10-£35/month): Good for invoicing and expenses

- FreeAgent (£19-£29/month): Popular with freelancers and contractors

Free Options:

- HMRC's own free software (basic functionality)

- Some accounting software offers free plans for very small businesses

At iUfinance, we specialize in Xero and Sage. We provide:

- Software setup and configuration

- Training on how to use it effectively

- Ongoing support and troubleshooting

- Bank feed connections

- Monthly reconciliation services

Choosing the Right Software:

Consider:

- Size and complexity of your business

- Whether you need invoicing features

- Integration with your bank

- Cost vs. features

- Quality of customer support

We can help you choose the right solution for your needs.

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HOW TO GET READY FOR MTD

Step 1: Check If and When You're Affected

For VAT: If you're VAT-registered, you should already be compliant. If not, you need to act immediately to avoid penalties.

For Income Tax: Check your qualifying income. If it's over £50,000, you'll need to be ready by April 2026.

Step 2: Choose MTD-Compatible Software

Research your options and select software that meets your business needs, fits your budget, has good reviews, and integrates with your bank.

Don't wait until the last minute - getting comfortable with new software takes time.

Step 3: Digitize Your Records

If you're currently using paper records, start scanning or entering data digitally. If using spreadsheets, transfer data to MTD software. If using old software, ensure it's MTD-compatible or switch.

Step 4: Connect Your Bank

Most MTD software can automatically import your bank transactions through a bank feed. This saves hours of manual data entry and reduces errors. Setup takes about 10-15 minutes per bank account.

Step 5: Get Trained

Learn how to record income and expenses, reconcile your accounts, generate reports, and submit returns to HMRC.

Many software providers offer free training resources, or you can hire an accountant to train you.

Step 6: Test Before You Go Live

Do a practice run: enter a month of transactions, reconcile your accounts, generate a test submission, and check everything makes sense.

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BENEFITS OF MTD COMPLIANCE

While MTD is mandatory, it actually offers several benefits:

1. Real-Time View of Your Finances

See your profit and cash flow at any time, not just at year-end. This helps with better business decisions.

2. Fewer Errors

Bank feeds and automatic categorization reduce manual data entry mistakes.

3. Tax Estimates Throughout the Year

Know roughly what you'll owe well before your tax deadline - no surprises in January.

4. Easier Year-End

If you're keeping records up to date quarterly, year-end accounts and tax returns are much simpler.

5. Better Business Management

Good accounting software provides insights into which products/services are most profitable, where you're spending money, cash flow forecasts, and debtor management.

6. Saves Time

Once set up properly, MTD software with bank feeds saves hours per month compared to manual bookkeeping. with bank feeds saves hours per month compared to manual bookkeeping.

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PENALTIES FOR NON-COMPLIANCE

HMRC can impose penalties for:

Failure to Keep Digital Records:

- Initial warning

- £400 penalty if not rectified within the notice period

Late Quarterly Updates:

- Point-based penalty system (similar to late VAT returns)

- Points accumulate for each late submission

- Penalty charged once threshold reached

Late Filing of Final Declaration:

- Same penalties as current self-assessment late filing (see our separate article)

Not Using Compatible Software:

- HMRC may reject your submissions

- Could be considered non-compliance

The penalties can add up quickly, so it's essential to get compliant before deadlines.

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COMMON MTD CONCERNS ADDRESSED

"I'm not good with technology"

MTD software is designed to be user-friendly. With proper setup and initial training, most people find it easier than spreadsheets or paper records. Plus, your accountant can handle the complex parts.

"It will cost too much"

Software costs £10-£35/month (less than £1/day). The time saved on bookkeeping and the tax planning benefits usually outweigh the cost. Plus, software subscriptions are a tax-deductible business expense.

"I don't have time to learn new software"

The upfront time investment (a few hours) pays off with ongoing time savings. Bank feeds alone can save 5-10 hours per month. And we can set everything up for you.

"What if I make a mistake?"

MTD allows you to correct errors in your next submission. Plus, working with an accountant means mistakes are caught before submission.

"My business is too small"

Even small businesses benefit from digital records. The visibility and time savings are valuable regardless of size.

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KEY TAKEAWAYS

✓ MTD for VAT is already mandatory - ensure you're compliant

✓ MTD for Income Tax starts April 2026 for higher earners

✓ You must use approved MTD-compatible software

✓ Digital record-keeping is required - spreadsheets alone don't count

✓ Start preparing now even if you have time - don't wait until the deadline

✓ Consider professional help for setup and ongoing compliance

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NEED HELP WITH MTD COMPLIANCE?

At iUfinance, we help businesses transition to Making Tax Digital with:

• Software recommendation and selection

• Complete Xero or Sage setup and configuration

• Bank feed connections

• Data migration from your current system

• One-on-one training on using your new software

• Ongoing bookkeeping and compliance support

• Quarterly and annual submission handling

Our monthly packages from £50 include everything you need to stay MTD-compliant.

Don't wait until the deadline - get MTD-compliant now and gain the benefits of better financial visibility.

Ready to get started? Book your free consultation today.