A simple guide to Making Tax Digital

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Self-Employed Tax

Making Tax Digital (MTD) was first introduced in 2019 and is gradually becoming relevant for more and more people – self-employed and limited company contractors alike. This article is designed to offer support by giving an overview of who is impacted and what it means moving forward.

Looking at invoice and doing taxes online

What is Making Tax Digital (MTD)?

At its basic level, the government has introduced a scheme whereby you will use compatible software to manage your tax affairs with HMRC. The aim is to make it easier for businesses to ‘get their tax right’ with everything being moved online.

When first introduced in April 2019 it only affected those businesses that were VAT registered and with a taxable turnover of £85,000 or over. From 1st April 2022 all VAT registered businesses must follow the MTD rules.

From 6th April 2026 MTD will also require self-employed businesses, and landlords, with income above £50,000 to follow the MTD rules so it’s best to start thinking about getting onboard now. Those with an income between £30,000 - £50,000 will be brought in from April 2027, but can voluntarily register earlier.

So, what are the MTD rules?

The rules say you must use ‘Functional Compatible Software’, in other words, a software program (or programs) on which you’ll keep digital records, and automatically send the relevant information and necessary returns.

HMRC will send you information via an Application Programming Interface (API). Many people currently use Excel to keep their records updated and if that’s the case, you’ll need -as a minimum - API-enabled bridging software to connect to the HMRC systems. While that would work, using approved software, such as FreeAgent (the preferred choice of Integro Accounting), would simplify things further.

How can people be prepared?

If you don’t already, start keeping digital records of your income and expenses and talk to your accountant about MTD-compatible software. Some, like Integro Accounting, will include it as part of their fixed fee. This software will enable you to report your financial data to HMRC every quarter.

Many people prefer to report their accounts themselves rather than using an accountant so will have to choose software that works best for them, it could be computer or phone based via an app, or both.

One of the key benefits to you is that the summaries generated by the software will tell you how much tax you owe which will allow you to better budget for your tax bill.

What do you need to do?

When you sign up to MTD not only will you need compatible software, you’ll need your Government Gateway ID and password – or create one when you sign up. Then there’s some basic information you’ll need to input as part of the sign up at gov.uk:

  • Your business name
  • Your email address
  • Your National Insurance number
  • The date your business started and your registered address
  • The dates of your accounting period
  • Your accounting type e.g. standard or cash accounting.

If you don’t already fall into the category of needing to comply with MTD, sooner or later you will. So decide on what you’re comfortable doing in terms of keeping your records. If you’re not comfortable with technology you can get your accountant to do this for you. Otherwise have a think about which system is best for you, be that Excel spreadsheets, an app for your phone or computer accounting software.

Once signed up you’re all set to use MTD compatible software to report your financial information to HMRC every quarter.

This software will take the data from your business activity and build an accurate picture of your tax in real time. Possible errors will be highlighted, and you’ll be prompted for relevant information. Once this data has been compiled either you or your accountant can submit it, via computer or smartphone, directly to HMRC.

What are the benefits to you?

Using software in this way will result in fewer errors in your accounts, and the ability to better plan financially. It’s worth noting here that you’ll still need to send a Self Assessment tax return to HMRC for the tax year before you signed up for MRD for income tax.

Who is impacted?

MTD for VAT expanded in 2022 to cover all VAT registered business with a taxable turnover below £85,000. This applied to all VAT returns starting on or after April 2022.

The next change will be in 2026 regarding Self Assessment.

If you want to learn a little more about MTD and how you can start investigating the best compatible software for you, speak to your accountant who will help you ascertain what will work best for you and your business. Our team of fully qualified accountants at Integro Accounting are here to help with all your needs. Simply call 0207 096 2659 or visit our dedicated IPSE package page for more information on our services.

Self-Employed Tax

Find out how to be tax efficient, read expert tips about Self Assessments and tax year end, and learn about the importance of digital record keeping.

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Meet the author

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Integro Accounting

Choose an accountant with integrity. Integro Accounting provides trusted accountancy advice from 5/5 rated accountants as well as tax advice and support for Limited Company Contractor, Freelancers and SME’s.

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