All VAT-registered businesses were mandated to comply with Making Tax Digital for VAT from April 2019.
But what are the next stages of Making Tax Digital and when will they come into effect?
In this article, we talk about Making Tax Digital for VAT, Making Tax Digital for Income Tax and Making Tax Digital for Corporation Tax, who needs to comply, and the different thresholds and timelines for each scheme.
Here’s what we cover:
Making Tax Digital thresholds
Making Tax Digital (MTD) is intended to streamline tax, improving accuracy and efficiency while making tax management easier for both taxpayers and the government.
HMRC says there have already been tangible benefits for businesses that have adopted MTD.
It’s being rolled out in phases and applies to different groups, each with its own set of thresholds.
Who Making Tax Digital applies to
Making Tax Digital for VAT
All VAT-registered businesses are now required to file their VAT returns under MTD rules.
Making Tax Digital for Income Tax
From 6 April 2026, MTD for Income Tax comes into play.
Sole traders and landlords or individuals with combined incomes will be required to file their income tax returns under Making Tax Digital rules if their income is over £50,000.
From 6 April 2027, MTD for Income Tax will extend to the above groups earning above £30,000.
And the government plans to move the threshold to above £20,000 before the end of this parliament and by 2029.
Making Tax Digital for Corporation Tax
The start date for this phase of Making Tax Digital is still unknown.
MTD for VAT threshold
MTD for VAT requires businesses to keep digital VAT records and adopt functional compatible software to submit their VAT returns to HMRC.
All VAT-registered businesses must now follow MTD rules.
If you’re VAT registered, you need to follow MTD rules for VAT.
For those who already pay by direct debit, it’s best not to sign up too close to the date your return is due. You don’t want to end up paying twice.
If you’re a direct debit payer, HMRC advises that you shouldn’t sign up less than seven days before your return is due or five days after your return is due.
MTD for Income Tax threshold
HMRC will apply thresholds to MTD for Income Tax, with the first phase launching 6 April 2026, and the second on 6 April 2027, with an as-yet unconfirmed extension in 2029.
It means from April 2026, sole traders and landlords with individual or combined business or property income above £50,000 will need to adopt MTD for their income tax returns from the first deadline.
If you fall into one of these groups, as part of MTD, you’ll need to maintain digital records of your business income and expenses.
Under MTD, you will also be required to send quarterly updates to HMRC using software that is functionally compatible with MTD. This ensures HMRC has an up-to-date view of your earnings and costs.
The quarterly reports will be required per business and at the end of the tax year, you will then need to submit a year end finalisation.
The year end finalisation has two steps:
- Submitting a Business Source Adjustable Summary (BSAS) to add any year end business specific details such as capital allowances and a declaration that the information is complete and accurate for this business.
- Submitting any adjustments that are needed for the taxpayer rather than each business, for example, claiming child allowances, and a declaration that the information is complete and accurate for you as an individual.
MTD for Corporation Tax threshold
HMRC hasn’t proposed a minimum turnover threshold for MTD for Corporation Tax, and it’s still unclear which type of businesses will be included in that phase of Making Tax Digital or when it will start.
In its 2020 consultation report on MTD for Corporation Tax, HMRC estimated that around £2.1 billion of lost corporation tax revenue was due to avoidable tax errors.
Making Tax Digital exemptions
HMRC says you can apply for an exemption from MTD for VAT if it’s not reasonable or practical for you to use computers, software or the internet.
Typical reasons for exemption might include age, disability, location, or religion
However, exemptions are considered on a case-by-case basis, and HMRC will take into account any reason you provide for why adopting MTD is not reasonable or practical.
In practice, you’ll likely need a strong argument for HMRC to grant an exemption.
HMRC has confirmed that trusts, estates, trustees of registered pension schemes, and non-resident companies will be exempt from MTD for Income Tax, at least from when it first comes into effect.
Making Tax Digital thresholds: Frequently asked questions
What is the threshold for Making Tax Digital?
All VAT-registered businesses must file their VAT returns via MTD for VAT, regardless of their taxable turnover above £90,000.
In addition, thresholds will apply to sole traders and landlords for MTD for Income Tax—above this level, they’ll need to switch to MTD for declaring income tax from employment and rental income from 2026 (£50,000 and over), 2027 (£30,000 and over), and sometime in 2029 (£20,000 and over).
Who is exempt from Making Tax Digital?
HMRC says it will consider making exemptions from the requirement to follow MTD rules in exceptional circumstances.
For instance, your location may mean you can’t get internet access, or a disability might make it impractical to follow the rules of MTD.
What is included in turnover for the VAT threshold?
VAT taxable turnover is the total value of everything you sell that’s not exempt from VAT during a rolling 12-month period.
You should include:
- The value of goods you hired or loaned to customers
- Business goods used for personal reasons
- Goods you bartered/part-exchanged
- Gifts, services you received from businesses in other countries that you had to “reverse charge”
- Building work over £100,000 your business did for itself.
You should only exclude VAT-exempt sales and the value of goods or services you supply overseas.
Editor’s note: This article was first published in November 2021 and has been updated for relevance.
The post Making Tax Digital thresholds: VAT, Income Tax and Corporation Tax appeared first on Sage Advice United Kingdom.