Making Tax Digital legislation: what exactly is it?

We’ve come a long way since Making Tax Digital (MTD) was first announced in 2015. Deadlines have changed, new regulations have been introduced, and taxpayers have been feeling the effects of a changing tax system.

With MTD for VAT in full swing, and MTD for Income Tax Self-Assessment (ITSA) on the horizon, now’s a good time to revisit the different legislation areas and get clear on Making Tax Digital law.

MTD VAT legislation

The primary legislation for both MTD for VAT and MTD for ITSA was laid out in sections 60 to 62 of the Finance (No 2) Act, 2017. It outlined how taxpayers should keep digital records and the frequency of submissions.

Secondary legislation, which became the VAT (Amendment) Regulations 2018, was presented to the House of Commons on 28 February 2017. It confirmed the use of functional compatible software that communicates via HMRC’s API platform, and shared the initial details of digital record keeping. This legislation came into effect for businesses above the VAT threshold (previously £85,000, now £90,000) on 1 April 2019.

Then on 7 September 2021, tertiary legislation – VAT (Amendment) Regulations 2021 – was laid before Parliament, and came into effect on 1 April 2022. This amendment required all remaining VAT-registered businesses below the VAT threshold to comply with MTD VAT rules from 1 April 2022.

Finally, further details of digital record keeping and digital links requirements were set out in VAT Notice 700/22. The notice explains digital linking requirements and what constitutes functional compatible software.

MTD Income Tax legislation

As we’ve already touched on, primary legislation for MTD for Income Tax was laid out in sections 60 and 61, and schedule 14 of Finance (No 2) Act 2017.

The legislation introduces the idea of giving ‘periodic updates’ no more than every three months – what we now refer to as ‘quarterly updates’. End of Period Statements (EOPS) and Final Declarations were also introduced in this legislation.

MTD for ITSA is due to begin on 6 April 2024 for individuals and partnerships (as set out in the Finance (No 2) Act 2017, sections 60 and 61, and schedule 14 (Digital Reporting and Record-Keeping) (Appointed Day) Regulations 2021 (23 September 2021).

On the same date (23 September 2021), two more sets of regulations were published (The Income Tax (Digital Requirement) Regulations and The Income and Corporation Taxes (Electronic Communications)(Amendment) Regulations), which updated existing legislation, incorporating further information on the implementation of MTD for ITSA.

Draft notices were published on 1 July 2022, inviting views on using functional compatible software, the information required for quarterly updates and EOPS, and retail sales election. The consultation closed on 28 July 2022, and the outcome is yet to be published.

In December 2022, the UK government announced that MTD for ITSA would be phased in from April 2026, instead of 2024. Landlords and self-employed people earning above £50,000 annually will need to follow MTD for ITSA rules from April 2026. Those earning above £30,000 annually will follow suit in April 2027.

Landlords and self-employed people earning below £30,000 and general partnerships are yet to be mandated.

We’re expecting further legislative updates in February 2024, following the 2023 Autumn Statement. This will include MTD-related changes, such as the removal of EOPS from the ITSA system, and easements for landlords. Learn more about the changes in our guide to how the 2023 Autumn Statement impacts MTD.

MTD Corporation Tax legislation

MTD for Corporation Tax legislation is yet to be confirmed. This phase of MTD will be implemented no earlier than 2026.

In July 2020, the UK government published its 10-year strategy, Building a Trusted, Modern Tax Administration System. Here, it was announced that the government would consult on the design of MTD for Corporation Tax in 2020, to ensure the system works for incorporated businesses (companies).

The consultation opened on 12 November 2020 and ran until 5 March 2021. Responses have been published, but the full statutory framework for MTD Corporation Tax is yet to be confirmed.

What happens if you don’t comply with MTD legislation?

Non-compliance with Making Tax Digital regulations could result in a penalty.

In January 2023, a new points-based penalty system was introduced for late submissions. If you miss a submission deadline, you get a point. Reach a certain points threshold (depending on the number of submissions you make in a tax year), and you incur a fine.

Delayed payments accrue interest over time, so it’s best to settle the bill quickly. This system is currently active for those following MTD for VAT rules, and will apply to MTD for ITSA when the rules come into effect.

Inaccuracy penalties for VAT, ITSA, and Corporation Tax remain unchanged. These penalties work differently to the new points-based system, so be sure to check HMRC’s guidance on compliance.

Specific penalties for non-compliance with MTD for Corporation Tax are yet to be confirmed. Read the existing guidance on Corporation Tax penalties for more information.

How to comply with MTD legislation

MTD law dictates that business owners use software to keep digital records and submit returns. Where multiple software programs are in place, you will need to uphold digital linking rules.

For MTD for VAT, it looks like this:

- Keep digital records of the following:

• Your business name, company address, and VAT registration number
• VAT accounting schemes used
• VAT on goods and services supplied
• VAT on goods and services received
• The rate of VAT charged on services supplied

- And submit VAT returns with HMRC-recognised software

For MTD for ITSA, it looks like this:

• Keep digital records of all business income and expenditure
• File quarterly updates using the records kept in HMRC-recognised software
• Submit a Final Declaration by 31 January, following the tax year

Once further updates for MTD for Corporation Tax have been published, we’ll share information on how to comply with the specific legislation. For more guidance, read our comprehensive guide to digital record keeping for MTD.

Whether you’re a sole trader, a landlord, or an accounting professional, Xero’s cloud-based software can help you comply with MTD legislation, so you can focus on building a healthy business.