Making Tax Digital (MTD)

Making Tax Digital (MTD) is a government initiative designed to modernise the UK tax system by requiring businesses and individuals to keep digital records and submit returns using MTD-compatible software. The goal is to reduce errors and improve efficiency, helping close the £9 billion tax gap caused by mistakes in tax reporting.

Since April 2022, all VAT-registered businesses, regardless of turnover, must use MTD for VAT. This means keeping digital records of their VAT transactions and submitting returns using compatible software. Previously, only businesses with taxable turnover above the £85,000 VAT threshold had to comply, but the rules now apply to all VAT-registered businesses. HMRC has introduced these changes to eliminate paper-based processes and reduce costly filing errors.

Looking ahead, MTD for Income Tax Self Assessment (ITSA) will be introduced in phases. From 6 April 2026, it will be mandatory for sole traders and landlords with an annual income over £50,000 to use MTD. This threshold will then drop to £30,000 from 6 April 2027. Those affected will need to keep digital records of their income and expenses, submit quarterly updates to HMRC, and provide an end-of-period statement and a final declaration each year.

Businesses must sign up for MTD at least five days after their last non-MTD VAT return deadline date, and no less than seven days before their first MTD VAT return deadline date, to avoid being charged twice for VAT. Failure to sign up for MTD or submit returns digitally can result in penalties, so it’s crucial to act early.

To prepare for MTD, businesses should:

• Choose MTD-compatible software that meets their needs.
• Set up digital links if using bridging software to ensure accurate data transfer.
• Review their record-keeping processes to ensure they comply with HMRC’s digital requirements.

At Henry & Banwell, we guide clients through the MTD transition, helping them choose the right software, set up digital links, and stay compliant with the latest requirements. If you need help with MTD or want to discuss your options, get in touch today.