On 21 July 2020 the UK government outlined its plans for extending the digitalisation of tax returns, known as Making Tax Digital (MTD). The plans cover value added tax (VAT), income tax and corporation tax.

The government considers that digital records result in greater accuracy and reduce errors by taxpayers, as help functions are built into the software. As the information is sent directly to HMRC there is no scope for transmission errors. The government is therefore keen to press on with implementing MTD on a compulsory basis to more groups of taxpayers.

VAT

MTD was from April 2019 made compulsory for VAT-registered businesses with taxable turnover more than GBP 85,000. These businesses must keep digital VAT records and use MTD compatible software to submit their returns. From April 2022, compulsory MTD for VAT will cover all VAT-registered businesses.

Businesses may choose to make use of dedicated record-keeping software; or they may use a combination of software packages. Spreadsheets can be used but the software must be capable of taking the relevant information from the spreadsheet and sending it to HMRC without the need for any further manual adjustment. Various bridging products are available to carry out this task for the taxpayer.

MTD for income tax

MTD for income tax is to be implemented from April 2023 for unincorporated businesses and landlords with total gross income above GBP 10,000. A quarterly summary of business income and expenses will need to be submitted to HMRC using MTD-compatible software.

A small trial of MTD for income tax is currently taking place and between now and 2023 this will be extended to permit more taxpayers to take part in the scheme and get to know the system before it becomes compulsory. HMRC will therefore extend eligibility for the pilot scheme over time and by April 2121 most sole traders and landlords will be supported.

Taxpayers will send details of their income and expenses to HMRC on a quarterly basis and HMRC would provide them with an estimated tax calculation to assist with budgeting. At the year-end non-business information would be added and their tax affairs would be finalised using MTD-compatible software. The objective is for the final tax computation to replace the self-assessment tax return.

Corporation tax

The government intends to consult in the autumn of 2020 on the details of extending MTD to corporation tax.