What Is Making Tax Digital? A Complete Guide for Businesses

This groundbreaking initiative represents a fundamental shift in how businesses in the UK manage and report their taxes. It aims to streamline and modernise the tax system by replacing traditional paper-based processes with digital ones, enhancing efficiency, accuracy, and transparency. For UK businesses, understanding the ins and outs of Making Tax Digital is essential for compliance and presents an opportunity to leverage technology for improved financial management. This comprehensive guide will delve into the intricacies of MTD, its implications, requirements, benefits, and how businesses can navigate this digital transformation seamlessly.

What Is Making Tax Digital?

How To Register for Making Tax Digital

How To Sign Up for Making Tax Digital for VAT

If you are VAT-registered in the UK, you’ll need to keep records and send your tax returns digitally. This means signing up for Making Tax Digital on the UK government website.

Start by finding compatible software for submitting returns. Your records must be preserved for up to six years, so you’ll need software to pull the relevant information from your digital tax records. Here’s a list of compatible software for MTD.

These records should include your business name and contact details, your VAT number and details of any schemes used. You should also keep a digital record of any VAT on supplies, including the rate you have charged and what has been made or received.

Other information you must keep includes:

• Adjustments to returns
• Time of supply
• DGT or daily gross takings (retail schemes only)
• Reverse charge transactions – recorded as a supply made and received if your software doesn’t record these for you

If you use the Flat Rate Scheme, you should include details of asset purchases you can reclaim tax on. If using the Gold Accounting Scheme, you may need to include the sales value and the total output tax on these purchases.

Finally, you should keep documents covering supplies made or received on behalf of your business, including volunteers, third-party businesses or employees.

Whilst you can use spreadsheets to determine what to send to HMRC, you’ll still need compatible software. You may also need ‘bridging software’ to convert records to the correct format for submission.

Need help calculating VAT for your small business? Use our handy online VAT calculator.

Your Making Tax Digital checklist

If you are VAT registered, you must sign up for MTD. Here’s what you need to get started with Making Tax Digital.

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Making Tax Digital for Income Tax

Starting April 2026, self-employed individuals, sole traders, and partnerships will be required to use compliant software to submit their tax returns instead of HMRC's old online services.

This will be done through Making Tax Digital (MTD), which will entail submitting quarterly updates to HMRC, followed by an end-of-period statement.

On the usual Self Assessment deadline of January 31st, you'll submit a single final declaration for all your income. Although MTD for Income Tax and Self Assessment (ITSA) was postponed due to the COVID-19 pandemic, it will now be launched in two phases.

• Phase 1: Those earning £50,000 and above will be required to sign up for MTD
• Phase 2: Self-employed workers earning £30,000 to £50,000 are required to comply with MTD

The government hasn’t confirmed the approach it will take for Making Tax Digital for individuals or businesses making less than £30,000.

What Is Making Tax Digital for Partnerships?

The original date for general partnership compliance with MTD for Income Tax was 2025. However, this is now on hold, with a new date to be confirmed.

VAT-registered businesses, including partnerships, were required to keep digital records and submit their VAT returns electronically using compatible software.

Here's how MTD for VAT applies to partnerships:

• Digital records: Partnerships are required to keep their VAT records in a digital format using MTD-compatible accounting or bookkeeping software. This includes details of all sales and purchases made by the partnership.
• Electronic submission: VAT returns must be prepared and submitted electronically through MTD-compatible software. This submission includes information about the partnership's VAT-registered activities, the amount of VAT owed, and any VAT reclaims.
• Accounting software: Partnerships need to use accounting software that meets HMRC's MTD for VAT requirements. This software needs to be capable of recording and storing VAT transactions digitally and submitting VAT returns online.
• Frequency: VAT-registered partnerships must submit VAT returns digitally on a quarterly basis, in most cases.
• VAT payments: The payment of VAT due still follows the existing payment procedures. MTD for VAT did not change the way VAT payments were made to HMRC.

Please note that tax regulations and MTD requirements may evolve, so it's crucial to check the most recent updates on the HMRC website or consult with a tax advisor or accountant to ensure compliance with the latest regulations related to MTD for Partnerships or any other tax matters.

Making Tax Digital for Corporation Tax

Here are some key points about MTD for Corporation Tax, based on the information available up to 2021:

• Future implementation: HMRC announced plans to expand MTD to include Corporation Tax in the future. The goal was to make it easier for businesses to manage their tax obligations by requiring digital record-keeping and electronic submissions for Corporation Tax.
• Digital record-keeping: Similar to MTD for VAT, MTD for Corporation Tax was expected to mandate digital record-keeping. Businesses would be required to maintain their financial records digitally using compatible accounting software.
• Electronic submission: Under MTD for Corporation Tax, companies would have to submit their Corporation Tax returns and related calculations to HMRC electronically through MTD-compatible software. This would replace the traditional paper-based filing.
• Timeline: While the government had announced its intention to introduce MTD for Corporation Tax, the specific implementation date was not finalized as of September 2021. Businesses were encouraged to stay informed about developments in this area.
• Software compatibility: Businesses subject to MTD for Corporation Tax would need to use accounting or tax software that meets HMRC's MTD requirements. HMRC usually maintains a list of approved software providers.
• Transitional period: When MTD for Corporation Tax is implemented, there may be a transitional period to allow businesses to adapt to the new requirements. During this period, businesses would need to ensure compliance with the digital record-keeping and electronic submission requirements.

If you need to sign up for Making Tax Digital, download our free MTD checklist for UK businesses, providing what you need to get started and complete the process.

Do I Have To Register for Making Tax Digital?

If your business is registered for VAT in the UK but you haven't signed up for Making Tax Digital (MTD), it's important to do so as soon as possible to avoid penalties.

The deadline for sign-up was November 2022. If you plan to register for VAT, you can reclaim VAT on items purchased for business purposes. Osome can provide expert support with VAT registration.

UK businesses generating less than £90,000 are not required to be VAT registered, but many choose to do so for a more professional appearance. After your first VAT return, you can sign up for MTD for VAT.

HMRC requires accounting records to be shared through MTD-compliant software on a quarterly basis using a milestone-based system. Annual returns and payment deadlines must also be met through this digital system.