No more Self Assessment? What Making Tax Digital (MTD) really means

Making Tax Digital (MTD) is the government’s wide-reaching digital initiative that’s already transforming the UK tax system, yet the process is still some way off completion. The government says it’s digitising the UK tax system to…

Making Tax Digital (MTD) is the government’s wide-reaching digital initiative that’s already transforming the UK tax system, yet the process is still some way off completion.

The government says it’s digitising the UK tax system to make it simpler for people and businesses to manage their tax affairs. MTD will mean that people and businesses with taxable income that’s subject to VAT, Corporation Tax or Income Tax will need to regularly record their financial data in MTD compatible software and report figures each quarter to HMRC. It’s hoped that this will prevent basic mistakes that cause disruption for taxpayers and cost the government many billions of pounds a year in lost revenue.

Making Tax Digital is being phased in over several years and it’s already impacted VAT, with Income Tax and Corporation Tax to follow. If you’re a self-employed sole trader and MTD hasn’t already affected you, it soon will. So, what can you expect? 

How has Making Tax Digital changed VAT?

The first phase of Making Tax Digital for VAT was introduced on 1 April 2019, and it applied only to VAT-registered businesses with a taxable turnover above the VAT threshold (£85,000). From 1 April 2022, all VAT-registered businesses, regardless of turnover, must comply with Making Tax Digital for VAT rules, and that will impact some high-earning sole traders.

Under Making Tax Digital for VAT, businesses (including VAT-registered sole traders) must maintain digital VAT records using MTD-compliant software, which also generates and sends quarterly VAT returns electronically direct to HMRC.

What about Making Tax Digital for Income Tax Self Assessment?

Making Tax Digital for Income Tax Self Assessment (MTD for ITSA) was due for introduction on 6 April 2023, but it’s been delayed one year until 6 April 2026 because of COVID-19 and stakeholder appeals for more time, according to the government. So, unless there’s another delay, self-employed sole traders will need to comply with MTD for ITSA requirements from 6 April 2026 if their taxable income is more than £50,000 a year.

If that includes you, you’ll still need to file a Self Assessment tax return for the tax year before you become MTD for ITSA compliant. But once you are, completing a Self Assessment tax return each year will become a thing of the past.

Time to join the MTD for ITSA test pilot?

Some taxpayers have already joined a live test pilot for MTD for Income Tax Self Assessment and you may be able to sign up now for Making Tax Digital for Income Tax if you’re a UK resident, registered for Self Assessment and your returns and payments are up to date. It gives you a chance to get used to the new system now and enjoy the benefits it offers, says HMRC.

Whether you sign up now or wait until 2026, you’ll need to use MTD-compatible software to keep digital financial records of your income and expenses. If you already use record-keeping software, make sure it’s MTD compatible. If it isn’t, you’ll need to find an MTD-compliant alternative.

How will the new MTD for ITSA reporting process work?

  • You’ll need to update your MTD for ITSA-compliant software records regularly and HMRC recommends doing this on the transaction date (ie when you receive or make payments) or as soon after as possible. You must fully update your records before you can submit your quarterly figures to HMRC.
  • Your MTD-compliant software will summarise your figures, which you’ll need to send online via your HMRC digital account. You’ll get up to a month after the end of every quarter to take care of this.
  • At the end of the tax year, you must finalise your figures and submit a final declaration to HMRC, confirming the accuracy of your updates, with any accounting adjustments made. Then you’ll get your tax bill. You must pay the tax you owe by 31 January in the following tax year. Late submissions or payments may lead to fines.

At any time, the MTD-compliant software will tell you how much tax you owe, based on the figures you’ve entered. This can enable you to better budget for paying your tax bill, so you can remain in control and avoid any nasty tax surprises at the end of the year.

If you’re already self-employed struggle to complete your Self Assessment tax return, Self Assessment filing software GoSimpleTax gives you an easier way to take care of your Self Assessment tax return. And to prevent mistakes and make sure you’re claiming all of your tax allowances and expenses, you can get your Self Assessment tax return checked by one of our experts.

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Blog content is for information purposes and over time may become outdated, although we do strive to keep it current. It's written to help you understand your Tax's and is not to be relied upon as professional accounting, tax and legal advice due to differences in everyone's circumstances. For additional help please contact our support team or HMRC.

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