Making Tax Digital (MTD) is part of the government’s plan to modernise the UK tax system. It involves keeping digital records of accounts and sending summaries to HMRC every quarter (i.e. every three months), instead of just filing one final annual return. The thinking is that needing to submit figures more often helps people keep track of how much tax they owe in real time and makes it easier to budget for their tax bill. HMRC also hope it will reduce the amount of careless mistakes made, which contribute to the 'tax gap', i.e. the shortfall in the amount of tax the government expects to be paid.
The MTD scheme has so far only applied to VAT reporting. In 2019 it was introduced for businesses with a turnover of more than £85,000 that pay VAT, and was this year extended to include all VAT-registered businesses. Companies that pay Corporation Tax will join MTD in 2026.
The original roll out for Income Tax returns was 2023, but was delayed to 6th April 2024. From this date, MTD will apply to those with income from self-employment or property where the annual turnover or gross income (profits before the deduction of allowable expenses) is over £10,000.
All UK residents who meet this requirement and are registered for Self Assessment before 6th April 2023 will need to sign up for MTD. Those who started earning self-employment or rental income on or after 6th April 2023 won’t have to join the scheme until after they have filed their first Self Assessment tax return.
The submitted quarterly summary generates an estimate of the tax due, but it is not due to be paid until the usual 31st January deadline of the following year. This will need to be filed using HMRC-approved software.
As these summaries are updates, not tax returns, a final report still needs to be sent by 31st January, either through the MTD software used or via a Self Assessment tax return. This will then calculate the final tax bill for the year. As usual, the deadline for making any balancing payments remains 31st January, and if tax is paid by payments on account, these deadlines will remain at 31st January and 31st July. In future however they are considering allowing taxes to be paid voluntarily throughout the year.
Even though the way information is submitted may be changing, HMRC stress that records still need to be kept, including things like receipts, invoices, bank statements and any other back-up evidence in the event that HMRC want to carry out an investigation into the information submitted.
Failing to sign up to MTD on time may generate penalties, as could being late to submit the quarterly tax summaries. The penalties will be in the form of a points based system, with a point added each time a deadline is missed, with an automatic fine (£200) after a certain number of points is reached.
The points threshold will vary depending on how often submissions to HMRC are required, so the threshold will be higher with more submissions. Points accrue separately for each tax (i.e. VAT and Income Tax), so going beyond the threshold in multiple taxes will mean fines for each.
HMRC have updated the guidance with regards to MTD for Income Tax this month so we will be continuing to keep an eye on this for the further clarification and changes that will potentially come between now and April 2024.
