When Does Making Tax Digital Start for You?

Making Tax Digital (MTD) is a UK government initiative transforming the tax system for businesses and individuals. Its purpose is to simplify tax administration, reduce errors, and enhance efficiency by mandating digital record-keeping and online submission of tax information. This program aims to create a more streamlined and accurate tax process, moving away from paper-based methods. Understanding its framework offers insight into global trends in digital tax administration.

Key Dates for Different Taxes

The implementation of Making Tax Digital has been a phased rollout, impacting different taxes and taxpayer groups. The initial focus was on Value Added Tax (VAT), followed by Income Tax Self Assessment (ITSA). This approach allows businesses and individuals to transition incrementally.

MTD for VAT became mandatory for businesses with a taxable turnover above the VAT threshold (£85,000) for VAT periods starting on or after April 1, 2019. These businesses must keep digital records and submit VAT returns using MTD-compatible software. From April 1, 2022, MTD for VAT became compulsory for all VAT-registered businesses, regardless of turnover. This included businesses voluntarily VAT-registered below the threshold.

The rollout for MTD for Income Tax Self Assessment (ITSA) has a staggered timeline, primarily affecting self-employed individuals and landlords. MTD for ITSA will become mandatory from April 6, 2026, for those with gross income exceeding £50,000 (based on 2024/25 tax year). From April 6, 2027, the requirement extends to those with gross income over £30,000 (based on 2025/26 tax return). The government expects MTD for ITSA to apply to businesses with income over £20,000 by April 2028 or 2029. Plans exist for MTD to eventually encompass other taxes, such as Corporation Tax, but specific dates are unconfirmed.

Digital Record Keeping Requirements

Meeting MTD obligations requires a change in how financial records are maintained. Taxpayers must transition from paper-based systems to mandatory digital record-keeping. Records of all relevant transactions, such as income, expenses, assets, and liabilities, must be kept digitally.

Central to digital record-keeping is MTD-compatible software. This software must accurately store and maintain digital records and communicate directly with the tax authority’s systems through an Application Programming Interface (API). Compatible software can be a single program or a combination, as long as they collectively support digital record-keeping and allow for digital links between data points. The software should also facilitate tax return preparation using the digitally held information.

For those using spreadsheets, “bridging software” offers a solution for MTD compliance. Bridging software acts as a digital link, extracting data from spreadsheets and converting it into an MTD-compliant format for submission. This allows users to retain familiar spreadsheet methods while meeting digital submission requirements. Limited exclusions may apply for individuals genuinely unable to use digital tools due to age, disability, remote location without internet access, or religious beliefs.

Submitting Information Digitally

Once digital records are maintained, the next step involves digital submission of tax information. This process leverages MTD-compatible software to send required updates and returns directly. MTD for VAT mandates that VAT returns are submitted directly from the software, replacing manual online entry or paper submissions.

For Income Tax Self Assessment (ITSA) under MTD, taxpayers must submit quarterly updates of income and expenses. These updates are sent through MTD-compatible software to the tax authority on specific deadlines: by the 5th of August, November, February, and May for the preceding quarters. These submissions provide a regular snapshot of financial activity, though they do not involve immediate tax payments.

Following quarterly updates, an annual “Final Declaration” must be submitted through the software by January 31st after the end of the tax year. This declaration consolidates all income and expenses, incorporates accounting adjustments or claims for reliefs, and replaces the traditional Self Assessment tax return. Upon successful submission, the tax authority provides confirmation.