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Making Tax Digital – What is MTD and does it affect me?

Making Tax Digital (MTD) is the government’s plan to transform the tax system and move it online. MTD will affect most businesses from April 2019 with further changes expected in 2020.

After MTD for VAT has been implemented, MTD for income tax (for the self-employed and those with income from property) and MTD for corporation tax are expected to follow, but not before April 2020 at the earliest. HMRC is also running an MTD for individuals transformation project.

The essential elements of MTD are:

Businesses and organisations (which includes those with income from property) will be required to maintain digital accounting records. Maintaining paper records will cease to meet the legal requirements in tax legislation
Businesses and organisations will be required to use a functional compatible software product to submit their returns to HMRC. The software will use HMRC’s API (Application Program Interfaces) platform to submit information to HMRC. The current HMRC online tax return services will be withdrawn for those within the scope of the MTD rules.

Timeline for MTD

  1. From April 2019: Impacts VAT reporting by all VAT registered businesses and organisations (including sole traders, partnerships, limited companies, non-UK businesses registered for UK VAT, trusts and charities) with turnover above the VAT threshold. HMRC has announced a 6 month deferral to the start date for some more complex businesses.
  2. From April 2020, at the earliest: Impacts MTD for income tax and corporation tax. MTD for VAT may also be extended to all VAT registered businesses. Further details have yet to be announced.

Who will have to switch to Making Tax Digital for Business?

As we mentioned above, VAT registered business above the VAT threshold will be affected from 1st April 2019. These businesses already have to report and pay any VAT due quarterly so the main change is the requirement for these records to be stored digitally and sent to HMRC using MTD compliant software. The days of just using excel spreadsheets are probably over!

The dates for introducing MTD for further taxes including Corporation Tax for limited companies, and Income Tax and National Insurance for sole traders have been put back to at least April 2020.

The most recent update from HMRC was the ‘Making Tax Digital for Business Stakeholder Communication Pack’ in July 2018. This confirmed HMRC had opened an MTD pilot for Income Tax for sole traders with income from one business, or landlords who rent out UK property (excluding furnished holiday lettings).

The pilot allows people who meet the criteria to voluntarily use MTD compliant software to keep their business records digitally and send Income Tax updates to HMRC quarterly, instead of filing an annual Self Assessment tax return. Users of the pilot will receive an estimate of their tax liability throughout the year. At the moment, the system isn’t able to be used by those with more complex Self Assessment returns.

Businesses, sole traders and limited companies, with turnover above the VAT threshold (£85,000 per year for the 2018/19 tax year), have until 1st April 2019 to comply with MTD. After this date, all VAT-registered businesses will need to store and submit their records digitally.

How do I prepare for Making Tax Digital?

If you’re a UKEA client, don’t worry – it’s all in hand. We’ve been working with HMRC for some time and our software has been confirmed as compliant by HMRC. We’ll be in touch with all our VAT registered clients over the next few months to let them know what to do to ensure a smooth transition ahead of the 1 April 2019 deadline.

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