Making Tax Digital compulsory for VAT from April 2022

Making Tax Digital compulsory for all (eventually)

Recent announcements make Making Tax Digital compulsory for all VAT registered business from April 2022.  The self-employed will be included from April 2023 and eventually Corporation Tax too.

All VAT registered businesses will have to comply with Making Tax Digital (MTD) from 1 April 2022 and not just businesses with a turnover over £85,000.  MTD for income tax has been delayed until 6 April 2023 so there is more time until you need to register for your personal tax return under the Making Tax Digital regime.

The current rules

Since 1 April 2019, businesses with a taxable turnover that exceeded the VAT registration threshold (currently £85,000) have been required to store their VAT records digitally and submit VAT returns via an interface with HMRC software.  The launch date for MTD for income tax has been delayed several times so individuals are still declaring their income via an annual self-assessment tax return.

When will this change?

From 1 April 2022, all VAT-registered businesses must comply with MTD for VAT regardless of their turnover.  Individuals with annual business or property income above £10,000 will need to follow the rules for MTD for income tax from their next accounting period starting on or after 6 April 2023.  HMRC will expand its MTD for income tax pilot service from April 2021 to allow individuals to test the full end-to-end service in advance.  The Treasury hopes that this timeline will give everyone involved enough time to prepare for the changes.

The government is expected to hold consultations on introducing MTD for corporation tax later this year.

What do I need to do if I am VAT registered?

Where you are VAT registered and already report MTD VAT returns, you probably don’t need to do anything.  If you are taking advantage of the soft landing on digital links, this concession from HMRC is scheduled to expire on 31st March 2021.  This may mean that any bridging software that you use or manual links no longer comply with HMRC rules from 1st April 2021.

In the situation where you are VAT registered but your turnover is below £85,000 you are not currently required to register for MTD.  Changing to MTD might require you to set up digital links for all your income and expenses.  Depending on your current setup, this can be time-consuming and definitely not something to be left to the last minute.

Alterledger recommends Xero to gather all your accounting records in one system.  After you are signed up for MTD you will no longer be able to type your VAT return figures into the HMRC website.  Xero satisfies all the requirements for digital links and allows you to stay compliant as MTD extends to income tax and corporation tax.

What will MTD for income tax look like?

Businesses and landlords who join MTD for income tax will need to send a quarterly summary of their income and expenses to HMRC using MTD-compatible software (e.g. Xero).  You will receive an estimated tax calculation to help you budget for your tax payments.  The estimate will be based on the information entered and won’t account for any tax-relievable payments such as gift aid or pension contributions, or any tax due on other income (for example investment income and capital gains).  At the end of the year, you can add any non-business information and finalise your tax affairs using MTD-compatible software.  This replaces the current system of an annual self-assessment tax return.

Why is Making Tax Digital compulsory?

Here is the HMRC explanation for Making Tax Digital:

Making Tax Digital is a key part of the government’s plans to make it easier for individuals and businesses to get their tax right and keep on top of their affairs.

HMRC’s ambition is to become one of the most digitally advanced tax administrations in the world.  Making Tax Digital is making fundamental changes to the way the tax system works – transforming tax administration so that it is:

• more effective
• more efficient
• easier for taxpayers to get their tax right

Although you might believe that the fundamental change is just to make things easier for taxpayers, you can see that the most digitally advanced tax administration will find it much easier to monitor tax and find out where records don’t match.  This could mean that if someone submits a return showing a VAT expense from your business, HMRC will be able to look up your VAT return to make sure there is a matching sales invoice in your business.  The technology is still a long way from being able to do this, but with advances in Artificial Intelligence and HMRC’s aspiration to be the most most digitally advanced tax authority, you can only guess where everything is heading.