The Making Tax Digital (MTD) initiative is a UK government programme aimed at modernising and digitising the tax system.
The initiative was introduced by HM Revenue and Customs (HMRC) to make tax administration more efficient, effective, and easier for taxpayers.
What’s in this Factsheet?
- Key legislation covering MTD;
- Key MTD implementation dates;
- What MTD covers;
- Who MTD applies to; and
- How Employment Hero can help with MTD.
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How does Making Tax Digital work?
It has been rolled out in phases, starting in 2019, with different deadlines for various types of taxpayers. Initially, it was implemented for VAT registered businesses with a taxable turnover above the VAT threshold, £85,000. Since 2022, all VAT registered businesses have been required to keep digital records and submit their VAT returns through compatible software.
Under the MTD initiative, businesses and individuals are required to maintain digital records of their financial transactions and submit their tax returns online using compatible software. This means that manual record-keeping and paper-based tax filing are being phased out.
The next phase of MTD will be the extension to self assessed income tax which will be rolled out in 2026.
Why did the UK government introduce Making Tax Digital?
The UK government introduced the Making Tax Digital (MTD) initiative with several objectives in mind.
1. Increased efficiency
The government aims to streamline the tax system by digitising tax-related processes.
By moving away from manual record-keeping and paper-based filing, MTD aims to reduce errors, improve accuracy, and enhance the efficiency of tax administration.
By promoting the use of compatible software and digital record-keeping, it aims to make tax administration more straightforward and accessible, reducing the administrative burden on taxpayers.
2. Better compliance
MTD aims to improve tax compliance by making it easier for individuals and businesses to meet their tax obligations.
By using digital records and online filing, it is expected to reduce the likelihood of mistakes or omissions in tax returns.
3. Reduce the tax gap
The tax gap is the difference between the amount of tax that should be collected by the government and the actual amount collected.
MTD aims to narrow this tax gap by improving accuracy and reducing instances of non-compliance, including errors or deliberate underreporting. And by encouraging timely and accurate reporting, the government anticipates an improvement in revenue collection.
Who needs to use Making Tax Digital?
Making Tax Digital already applies to all VAT-registered businesses, and the next phases of the roll out will apply to sole traders and landlords. There are also exemptions which apply in specific circumstances.
1. VAT-registered businesses
Since 2022, MTD has been mandatory for all VAT-registered businesses. However, the requirements vary depending on the specific tax obligations and the turnover of businesses.
2. Sole traders and landlords
From April 2026, MTD for Income Tax Self Assessment (ITSA) will be rolled out for sole traders and landlords with an income over £50,000 a year. This will then be extended to sole traders and landlords with an annual business or property income of more than £30,000 the following year.
3. Limited companies
HMRC has indicated that MTD for Corporation Tax will not be mandated before April 2026, and the MTD for Corporation Tax consultation suggests that a pilot of the service could be launched in 2024.
It’s also worth mentioning that certain exemptions and deferrals may apply in specific circumstances.
For example, businesses or individuals who fall within the deferral category may have extra time to comply with the MTD requirements. Additionally, individuals or businesses with limited digital capabilities or accessibility issues might be granted exemptions, allowing them to continue using non-digital channels to meet their tax obligations.
How will Making Tax Digital change the way things are done?
The goal of MTD is to digitise record keeping and streamline online tax filing.
This means transitioning from manual record-keeping methods to using compatible digital accounting software or spreadsheets.
Taxpayers will no longer be able to file paper-based returns for taxes covered by MTD. Instead, they will have to submit information to HMRC digitally.
In addition, the emphasis is on real-time reporting. Businesses and certain individuals will be expected to provide regular updates on their income, expenses, and tax liabilities electronically. This shift from annual or periodic reporting to more frequent updates allows for better monitoring of tax obligations and reduces the chances of errors or omissions.
How can employers find MTD-compatible software?
HMRC maintains a list of compatible software that offer MTD-compatible solutions. If you’re not sure, you can check with your accounting software provider.
In case you’re wondering, Employment Hero Payroll integrates with Quickfile, an MTD-compatible platform to automate professional invoicing, full expense management, digital VAT filing, and more.
Go digital with Employment Hero
Going digital has never been easier. If you’re looking for an all-in-one HR and payroll platform, let Employment Hero help you. Our platform streamlines all of the manual processes relating to HR and payroll, such as paperless onboarding, timesheets, rostering, automated payroll processing, customisable payment calculations, flexible payslips, and so much more.
If you’re unsure about the next steps, get in touch with our friendly business specialist team. They can walk you through your individual business needs, and show you the tools you need to take HR and payroll digital too.