Making Tax Digital & Cloud Accounting

The following sets out the key information surrounding HMRC‘s Making Tax Digital (MTD) Plan.

What is Making Tax Digital (MTD)?

MTD has been the biggest change in the UK tax system for over 20 years. HMRC aims to digitise tax administration in the UK so it is more effective, efficient, and easier for taxpayers to get their taxes right.

Many businesses and individuals already use online banking and platforms to pay bills or communicate with their customers or suppliers. Many are already using online accounting packages. Digitising the tax system is a natural progression of this. MTD already applies to VAT registered businesses and is now being rolled out to income tax payers.

Making Tax Digital (MTD) for Income Tax

MTD for Income Tax will supplement HMRC’s Self Assessment process for those self-employed and landlords with rental properties, which was introduced in 1996.

Unlike Self Assessment, which requires taxpayers to file one tax return each year, MTD for Income Tax will (in addition to self-assessment) require taxpayers to:

• record their income digitally using HMRC approved MTD compatible accounting software or Excel spreadsheets that link to HMRC’s MTD for Income Tax portal;
• digitally submit quarterly income and expense information to HMRC;
• make accounting adjustments and allowances and submit a statement confirming all their income information is up to date;
• submit a final declaration (similar to the current Self Assessment tax return) to confirm they have declared all sources of income for that tax year;
• Pay any tax owed to HMRC by 31 January (the same as the current deadline).

Taxpayers will have to decide whether to undertake the above tasks themselves or outsource some or all of them to their accountant.

As the above criteria show, the most significant change affecting taxpayers will be the requirement to submit income and expense information quarterly. While these changes may appear quite onerous, there are advantages of transitioning to MTD, which we have highlighted below.

Who is affected by MTD for Income Tax?

Broadly speaking, MTD for Income Tax applies to self-employed people and property landlords and will be introduced in stages, depending on an individual’s annual income. The deadlines and ‘qualifying income’ thresholds for each stage are:

• Stage 1 – from April 2026 – for those with gross annual income of £50,000 or more from self-employment or rental income.
• Stage 2 – from April 2027 – for those with gross annual income between £30,000 and £50,000 from self-employment or rental income.
• Stage 3 – Date TBC – for those with gross annual income between £20,000 and £30,000 from self-employment or rental income. HMRC has yet to confirm the implementation date but has said it will be sometime during the current parliament, i.e. before 2029.

HMRC has not announced when MTD for Income Tax will apply to partnerships.

The term ‘Qualifying Income’ includes gross income from self-employment and/or any income received from UK or overseas property. It does not include PAYE employment. However, income received from dividends, savings, pensions, etc., must be declared on the final declaration.

Specific MTD for Income Tax eligibility criteria

The income thresholds mentioned above form part of the eligibility criteria. In addition, the new MTD for Income Tax rules will apply to individuals who are:

• registered for Self Assessment;
• landlords with income from UK or overseas property, whether from private, commercial or holiday lets;
• also VAT registered and will have to comply with both MTD for VAT (see below) and MTD for Income Tax.

Furthermore, taxpayers who have income from multiple sources, such as a self-employed builder who also rents out an industrial unit, will be required to make separate submissions for each business/source of income.

MTD for VAT

MTD for VAT was the first phase of HMRC’s digital tax plan and was introduced in 2019. It requires all VAT registered businesses with a taxable turnover above the VAT threshold (£90,000) to comply with the new rules. Since 2022 it has also been mandatory for all VAT registered businesses with a taxable turnover below the VAT threshold to sign up to MTD for VAT.

‘Taxable turnover’ includes standard, reduced and zero-rated goods and services but does not include exempt supplies or income outside the scope of VAT. MTD will also apply to businesses that operate the Flat Rate Scheme for VAT.

What are the key changes surrounding MTD for VAT?

VAT registered businesses now have to keep and maintain their business records in a digital format. They also have to submit digital VAT records to HMRC’s online MTD for VAT portal using only MTD compatible software, or risk receiving penalties.

What is MTD compatible software?

This is accounting software which allows the digital (online) exchange of your data to and from HMRC’s system. This could also include spreadsheets as long as they are capable of transferring information to and from HMRC’s system digitally using an Application Programming Interface (API), also known as ‘Bridging Software’.

Filing paper tax returns or copying and pasting tax data into an online income tax return will no longer be permissible.

Are there any exemptions from MTD?

HMRC may grant exemptions to MTD on the grounds of age, disability, remoteness of location or for other reasons such as religious beliefs which prevent individuals or businesses from using computers.

What are the advantages of MTD?

As a result of transitioning to MTD, businesses, self-employed individuals and landlords will benefit from:

• having up to date financial records throughout the year, not just after the year-end when the final accounts are prepared;
• improved accuracy of their records as a result of making fewer errors by using MTD compatible software rather than relying on manual calculations;
• developing a better understanding of how the business is performing during the year, enabling them to make better, timelier decisions;
• implementing more proactive tax planning strategies to minimise future tax liabilities;
• having an improved cash flow position due to a better handle on debtors and creditors and knowing how much tax will need to be paid and when.

Cloud Accounting

At Sam Rogoff & Co, we put cloud accounting and technology at the forefront of your business, whether you are looking to grow or simply create efficiency in your finance function. This enables us to go above and beyond for your business and offer more than just pure compliance.

We understand that as a self-employed individual or a business owner, you want the latest information at your fingertips. By using cloud accounting and associated apps, we can work collaboratively with you to provide an insight behind the numbers, which enable you to become more reactive to changes as and when they occur.

We work predominantly with Xero as a certified Platinum Champion Partner, and we are also widely experienced in using QuickBooks Online, Sage Online Accounting, FreeAgent and many other softwares.

By moving to a cloud accounting package you will be able to:

• Log in on your mobile or tablet, Mac or PC to access your finances at any time – no need to send a backup file of your accounts by email.
• Link your software to your bank account, to enable you to have a daily snapshot of your business and automate your bookkeeping processes.
• Comply with MTD for VAT and/or MTD for Income Tax.

We won’t just set you up on an accounting software package subscription and leave it there – we can discuss your needs and tailor a package to suit your business, so you won’t have to worry about your finance function.

We partner with a number of software providers and applications, which integrate seamlessly with your accounting package and carry out anything from a cashflow forecast for the future based on up-to-date figures, to comprehensive inventory management. Perhaps you are looking for financing options to assist with short term cash flow or looking at a challenger bank to reduce exchange rate losses – we would be able assist you.

Whether you are a contractor looking to send out a quote on a job, need a shiny new invoice template designed, or are starting up a new business and want to put a new system into place, we can assess your requirements and put a system in place that works for you.

We look not just at the bottom line, but at the business as a whole to provide a multi-dimensional accounting and advisory service.

We can help you to spend less time unpicking your finances and devote more quality time doing what you want to do, whether it be running the business or spending time away from the office.