By Stuart Miller, above, Head of Product Compliance and Industry Engagement, Xero
Making Tax Digital (MTD) is the government-led initiative that does what it says on the tin. Depending on the phase of its implementation – each one impacting a certain size or type of business – business owners across the UK will need to ensure they’re taking their tax returns from manual to digital processes.
The MTD for VAT start date came and went in 2022, meaning many VAT-registered businesses with taxable turnover under £85,000 are already enjoying the benefits of digital tax returns – from the streamlining of onerous, time-consuming tasks, to achieving broader efficiencies. Meanwhile, HMRC has now introduced a new VAT penalty system which is intended to encourage VAT registered businesses to meet their reporting obligations in a timely fashion.
However, other business segments like non VAT-registered self-employed individuals and landlords, still have plenty of time to become compliant as the deadline for MTD for Income Tax Self Assessment (ITSA) has been delayed until April 2026. This gives small businesses, accountants and bookkeepers more time to prepare in an uncertain economic environment. This is time that shouldn’t be wasted, because MTD and the digital change it catalyses can spark real benefits for businesses.
A potted history
On November 1 2022, HMRC closed the old online VAT portal. This meant all VAT-registered businesses using the HMRC gateway to submit VAT returns could no longer do so – and instead now have to carry out the process through MTD-compatible software.
This was no surprise. MTD has always been an unavoidable reality, even if many owners have understandably put off what can be seen as a daunting transition.
This, however, shouldn’t be the case. VAT-registered businesses that are yet to become MTD compliant may be missing out on the potential of digital tax as a catalyst for broader digital transformation. They are also at risk of receiving a penalty from HMRC for failing to comply with their MTD obligations.
The MTD for ITSA delay should alleviate pressure for many self-employed professionals and landlords in the near term. When it eventually comes into effect, those groups of taxpayers – so long as they have turnover above £50,000 annually – will need to comply with MTD rules from April 2026.
Those with turnover above £30,000 have until April 2027 to become MTD compliant. Practically, this means sending quarterly updates to HMRC via MTD-compatible software, as well as an End of Period Statement (EOPS) and a Final Declaration once a year.
Although the delay to MTD for ITSA has been announced, it should not change the way sole traders, landlords and small businesses approach the journey to compliance. And for those that have already complied with MTD for VAT, it should not be the end of their digital transformation, but the beginning.
It’s never too soon for digital
From optimising time-consuming tasks to improving the efficiency and accuracy of the tax process, MTD gives small businesses, accountants and bookkeepers an opportunity to re-evaluate their relationship with technology. Even if MTD for ITSA is a little further down the road, it’s never too early for businesses to get their ducks in a row by adopting compatible accounting software now.
And MTD can be viewed as a platform to adopt other digital tools across the business. Now more than ever, technology is a crucial part of preparing for the challenges ahead and differentiating from competitors.
For example, a huge number of small businesses are facing cash flow crunch – when expenses in a given month exceed revenue. But digital tools can help business owners better monitor expenses and get paid faster, which are both vital aspects of managing cash flow.
In addition, our research demonstrated a positive link between digitalisation and performance. Businesses in the lowest quartile of technology expenditure saw sales fall, on average, by £33,600 between 2019 and 2020. However, those in the top quartile of IT spend experienced a much smaller drop of just £1,200 year-on-year – a difference of £32,400.
Despite the delay to MTD for ITSA, affected businesses shouldn’t wait for the inevitable pre-deadline rush to become compliant. It’s important to make the most of the time that individuals and businesses have now to prepare, turning to their accountant or bookkeeper for support if needed.
Digital tax presents small businesses with an opportunity to drive wider digital transformation to increase efficiency and resilience. The MTD timeline may have shifted, but the benefits of embracing digital change don’t need to wait.