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7 Min. Read

When Does Making Tax Digital Start?

When Does Making Tax Digital Start?

Making Tax Digital has already started for individual taxpayers and Value Added Tax(VAT)-registered businesses. Her Majesty’s Revenue and Customs (HMRC) has a long-term Making Tax Digital plan. It's designed to streamline the entire tax system by taking the majority of processes online. A firm, final good-bye to paper records.

It will eventually encompass the tax affairs of individuals, self-employed businesses, landlords, Small and Medium-Sized Enterprises (SMEs) and large corporations. Minimising the tax lost through administrative errors. Maximising tax efficiency for taxpayers and the Treasury.

It's up to you to make sure that you're Making Tax Digital ready. But that doesn't mean that you're going it alone. FreshBooks is always a step ahead, keeping pace with HMRC developments so that we're ready for the next stage before you need it. Check what phase you're in. Then have a look at the guides we've got ready for you.

Here’s What We’ll Cover:

Phase 1: Making Tax Digital (MTD) for VAT

Phase 2: Making Tax Digital for Income Tax

Phase 1: Making Tax Digital  (MTD) for VAT

Making Tax Digital for VAT is the first official phase of MTD - and it's already started!

From April 2019 VAT-registered businesses that met the VAT threshold had to switch to Making Tax Digital for VAT rules. The VAT threshold is still £85,000 annual turnover. This means that they needed to keep digital VAT records and submit VAT returns online to HMRC - from the end of their first accounting period after 1st April 2019.

In April 2022, all voluntarily VAT-registered businesses will need to be using MTD for VAT, whether they have taxable turnover above the VAT threshold or not. This means that from your first accounting period after April 2022, you'll need to be following the Making Tax Digital for VAT regulations.

What does this mean for VAT registered businesses?

Practically speaking, VAT-registered businesses need Making Tax Digital accounting software. You've got 2 options. You can either keep your VAT records as they are and get bridging software that links to HMRC systems. Or you can use accountancy software that keeps digital records and sends your tax information straight to HMRC. FreshBooks customers don't need to worry about it - your account’s completely MTD for VAT compatible.

If You're a Newly VAT-Registered Business... need to know that there's no free HMRC generated software, but there’s a list of 'recognised software' to choose from. It's a sizable list, but there are 6 features you can use to narrow your search.

It's important to note that, "HMRC does not endorse or recommend any one product or software provider." Be wary of any companies claiming HMRC endorsement - especially if they don't feature on this list. There are some free options available. You'll find FreshBooks' '10 Best Making Tax Digital for VAT Software' guide useful when you're making your decision.

As a VAT-registered business, you need to keep digital records of all your VAT and other business transactions. And you must be able to send your quarterly VAT returns online, straight to HMRC's platform.

To avoid unnecessary stress, it's important to remember that this is not new information. It's just presenting your tax affairs in a new, digital format. Yes, there's some adjustment. But it's not an entire overhaul of tax legislation. And you can give your accountant access, or have them set up as your tax agent.

Phase 2: Making Tax Digital for Income Tax

Making Tax Digital for Income Tax applies to UK landlords and self-employed businesses with annual income over £10,000. It starts on your next accounting period from 6th April 2023. To keep your tax right, with the minimum of hassle, it's wise to figure out what you need to do now.

For you, Making Tax Digital for Income Tax means making 2 main changes:

  • Keep digital records of your self-employed business or landlord income
  • Submit quarterly and annual information to HMRC

What Do I Need to Be Ready for Making Tax Digital for Income Tax?

Every business that meets the £10,000 registration threshold for Making Tax Digital for Income Tax needs compatible accounting software. If you've got FreshBooks, you're one step ahead because you're already keeping digital records. And you'll be able to submit the necessary documents straight to HMRC through FreshBooks.

You need to decide if you want making tax digital software programs that keep digital records and link directly to HMRC's portal. Or if you prefer bridging software that connects what you’re currently using, like spreadsheets, to the correct HMRC platform.

You can use either downloadable or cloud accounting software. HMRC doesn't give businesses free compatible software, but it does curate a list of recognised software. At the moment, this is a much shorter list than the Making Tax Digital for VAT one and the search descriptors are much less detailed.

Do I Still Submit a Self-Assessment Tax Return?

No, Making Tax Digital for Income Tax removes self-assessment tax returns and brings in new tax administration for small businesses. As well as keeping digital tax records, you'll need to send a quarterly income and expenses update to HMRC. When each accounting period ends, you'll need to complete an End of Period Statement (EOPS) for each business or property income. This includes your tax allowances and reliefs claim. As an individual, you also submit a Final Declaration at this point. This is a legal acknowledgement that you agree with HMRC's income tax calculations based on your information. And the declaration that you haven't left anything out of your submission.

As you can see, you've already got all the information you need in your FreshBooks app. It's the same details you need for a self-assessment tax return. It's just a question of taking a bit of time to get your head round a new way of presenting it to HMRC. And we're here to help with that bit too.

Making Tax Digital for Income Tax Pilot

If you fancy just getting on with it, rather than waiting for HMRC's deadline, you can sign up to the pilot programme. You just need to check that your business fits the eligibility criteria, get the compatible software and then follow HMRC's step-by-step process. We've got some more detail about the Making Tax Digital for Income Tax pilot here.

Phase 3: Making Tax Digital for Corporation Tax

Making Tax Digital for Corporation Tax will apply to limited companies and, currently, the government says it will start in 2026.

At the moment, this is in the consultation stage of development. HMRC ran an open call for input from companies, other organisations that fall within Corporation Tax, software developers, tax agents, accountants and relevant professional bodies. This consultation period was from 12 November 2020 to 5 March 2021. HMRC also held 9 virtual consultation events during January and February 2021. Each one for corporations in a different industry sector, with individual sessions for charities, public bodies and representative bodies.

The online consultation form contains 22 questions that cover a lot of details about the implementation of Making Tax Digital for Corporation Tax and who should be part of it. Once the results are analysed, you'll be able to read the conclusions here.

What About Penalties For Missing Deadlines?

Due to coronavirus, HMRC extended the 'soft landing' period for MTD for VAT until March 2021. This means that they weren't looking to enforce penalties for mistakes or missed deadlines for VAT return submissions before then. There will be a sanctions system put in place for Making Tax Digital for Income Tax and, no doubt, Making Tax Digital for Corporation Tax. But HMRC does allow adjustment periods whenever they introduce new tax legislation.

You probably won't ever have to concern yourself with fines for missing deadlines, because FreshBooks keeps all your tax records ready for filing in a couple of clicks. The trick is to be prepared. Don't wait until you're legally obliged to comply to find out what you need to do.