Blog What is “Making Tax Digital”?
- AbraTax Team
Making Tax Digital (MTD) was first announced in 2015 by the UK government as a transformative, modern approach to the traditional tax system, including Income Tax Self Assessment (ITSA). It is a revolutionary step in reporting tax which HMRC hopes will both benefit the taxpayer and reduce the so-called ‘tax gap’.
For many people, this revolution has already begun – or will be beginning soon. In this article, we outline MTD, its benefits, timeline, and how you can prepare for the future of taxation.
Making Tax Digital (MTD) is a significant piece of legislation set to transform our relationship with HMRC’s tax system. It is currently being introduced in a one-step-at-a-time ‘soft landing period’ (timeline below).
The most significant change brought about by MTD is the introduction of legal requirements to store financial records digitally and file tax returns online. It will also become mandatory to file tax returns every 3 months.
For VAT-registered businesses, these changes have already taken effect – however, many people will need to prepare in the next couple of years for some more drastic updates (particularly for Income Tax Self Assessment (ITSA)).
HMRC aims to benefit two main areas: first, the digitisation of tax returns should be less time-consuming, and more efficient for the taxpayer.
Second, HMRC envisages that MTD will help reduce the ‘tax gap’, which is the mismatch between expected tax returns and actual tax returns. It is understood that MTD will produce a system less prone to human error; in addition, the mandatory tax returns every 3 months will bring tax data closer to ‘real time’.
MTD is already happening in the realm of VAT: as of April 2022, all VAT-registered businesses are now required to send their VAT Return quarterly (every 3 months). However, there are more updates on their way, during the ‘soft landing period’ over the next few years.
The following dates are set for the introduction of MTD for Income Tax and National Insurance contributions:
April 2026 – Self-employed business owners and landlords with income over £50,000 p.a.
April 2027 – Self-employed business owners and landlords with income over £30,000 p.a.
After these dates, it will be mandatory for the specified groups to use the new system. This involves a legal requirement to store all relevant financial records digitally, and to file quarterly tax returns online through Making Tax Digital-compatible software (such as AbraTax).
If you are a self-employed business owner (‘sole trader’) or a landlord earning more than £30,000 per year, then MTD will apply to you. MTD will begin for you in April 2027 – or April 2026, if you earn more than £50,000. This is essential information for those of us who have a side gig alongside our day job (or run our own full-time businesses) and usually submit an Income Tax Self Assessment.
If you run a VAT-registered business, then MTD already applies to you (unless you have received an exemption from HMRC) – even if there is no VAT to pay or reclaim. If submitting your VAT Return yourself, make sure to use HMRC-recognised MTD-compatible software (such as AbraTax).
Submitting quarterly declarations to HMRC sounds laborious and time-consuming – and it could be! Luckily, however, the MTD legislation allows for the use of third-party systems called ‘bridging software’ to help ease the process. Businesses and agents like AbraTax have already begun to offer HMRC-recognised services for your online VAT Return, and you can also sign up in preparation for Making Tax Digital for Income Tax.
The advent of Making Tax Digital marks a monumental shift in the UK's taxation landscape. With ongoing and upcoming streamlined tax returns for businesses and individuals, now is the time to get ahead of the curve and embrace this exciting change. Whether you're a self-employed business owner, landlord, or run a VAT-registered business, software solutions like AbraTax are already paving the way for a smoother transition, allowing you to focus more on growing your business and spend less time navigating tax formalities.
If you found this article useful, why not take a look at our other articles for more personal finance and tax advice?