Making Tax Digital: current exemptions

With Making Tax Digital (MTD) pilot schemes well under way and the initiative set to roll out in full from 2020, it's certainly not too early to find out how MTD will affect you and your business, or if it will affect you at all. So far, HMRC has identified a few groups who the new digital tax initiative will not apply to - so who is exempt from Making Tax Digital?

Current exemptions from Making Tax Digital

Many respondents to HMRC’s 2016 consultations were concerned about the practicality of Making Tax Digital (MTD) for smaller businesses and the inability of some businesses and individuals to use accounting software. While the difficulties for smaller businesses are still being considered, HMRC has decided that the following groups will be exempt:

The digitally excluded

ONS statistics on internet use in the UK show that internet adoption is increasing: in 2016, 82% of adults used the internet daily and 70% of adults accessed the internet on the go from a mobile device. However, HMRC recognises that a minority of people genuinely cannot use digital tools and has agreed to legislate for an exemption.

This minority, referred to as the ‘digitally excluded’, are defined as those who cannot engage with accounting software or apps for reasons of:

  • religion
  • disability
  • age
  • remoteness of location

In its summary of responses, HMRC also stated “any other reason” for being digitally excluded as a justification for exemption to MTD and suggested that it will consider exemptions on a “case-by-case basis”.

Exemption threshold for MTD

HMRC has confirmed an exemption from Making Tax Digital for unincorporated businesses and landlords with a gross income/annual turnover below £10,000. In the consultation, many respondents considered this threshold to be too low and felt it would be unreasonable to impose MTD obligations on businesses this small. As a result, the Chancellor announced in the 2017 Spring Budget that unincorporated businesses with annual sales between £10,000 and the VAT threshold would be given an extra year to prepare for MTD.

If you don't meet any of the exemption criteria it's up to you to find the best Making Tax Digital software for your business before the initiative rolls out. Check out our MTD guides and resources for more information about how and when MTD will affect you.

MTD for VAT: watch out for penalties if you're not exempt and fail to comply

Making Tax Digital for VAT came into effect on 1st April 2019. This means that all businesses with VATable sales above the VAT threshold need to comply with the MTD for VAT rules set out by HMRC. While HMRC has described the first year following the launch date as a "soft landing period" there may still be penalties for business owners who are not exempt and fail to comply. Find out more in our MTD for VAT penalties guide.

The scope of Making Tax Digital for VAT will expand in 2022. VAT-registered businesses with a taxable turnover below £85,000 will need to follow Making Tax Digital rules for their first VAT return starting on or after April 2022.

In response to the coronavirus crisis, HMRC has extended the soft landing period. All MTD-mandated businesses will now have more time to put in place digital links between all parts of their functional compatible software. This means that you now have until your VAT period starting on or after 1 April 2021 to put digital links in place.