Making Tax Digital (MTD) jargon buster
With Making Tax Digital for Income Tax Self Assessment (MTD for ITSA) drawing ever nearer, we’re on a mission to make MTD as simple as possible for everyone.
With this in mind, we’ve put together a handy glossary of MTD terms to help you understand the language of digital tax legislation.
Accounting software is a computer programme that businesses and accounting professionals use to process financial transactions, store financial data and automate certain bookkeeping and accounting tasks. Accounting software, like FreeAgent, enables users to complete a wide range of activities including sending invoices, creating accounting reports, running payroll and submitting tax returns to HMRC. Under MTD, taxpayers who are affected by the rules will need to use HMRC-approved accounting software to make various tax submissions.
As a business owner, you can authorise an accountant, bookkeeper friend or relative to help with your tax affairs and deal directly with HMRC on your behalf. This person is referred to as your ‘agent’.
Need to find an agent to help file your MTD for VAT returns or prepare for MTD for ITSA? Head to our directory of accountants, where you’ll find someone who can help you get set up with FreeAgent’s MTD for VAT-compatible software.
Agent authorisation is the process of authorising an agent to deal with certain tax services, on your behalf.
An annual summary is a set of summary data for a tax year. It contains all of your business’s allowances and adjustments, broken down by category.
Application Programming Interface (API)
An API enables two digital systems to talk to each other. In the case of MTD, an API enables your accounting software to send and receive information to and from HMRC.
Bridging software is a tool that links data stored in spreadsheets with HMRC, enabling VAT data to be submitted digitally. Be aware that bridging software does not fulfil all the requirements of MTD legislation, such as digital record keeping and maintaining digital links between data. Make sure you check with your accountant before committing to bridging software as a long-term MTD solution.
Business Tax Account (BTA)
A Business Tax Account is an online account with HMRC in which limited companies, partnerships, sole traders and landlords are able to view all their tax information online. You can already access your account but HMRC will add more features to this service as MTD continues to roll out.
A client is a person or business who uses the services of an accountant or bookkeeper. If an agent manages your tax affairs, you are their client.
Digital tax account
’Digital tax account’ is the collective term for online accounts with HMRC. The term covers both Business Tax Accounts and Personal Tax Accounts.
A digital link is a connection from one piece of software to another. In the case of MTD, this is the connection between the software where you keep your accounts and HMRC. Under the rules of MTD for VAT, you must maintain this digital link so you can submit regular updates to HMRC.
End of period statement
An end of period statement (EOPS) is a document that HMRC will require taxpayers to submit under MTD for ITSA.
‘Final declaration’ is the process by which compatible accounting software will bring together all of the data you need to provide to HMRC to establish your tax responsibilities for a specific year under MTD for ITSA. If you work with an accountant or bookkeeper, they may make corrections to accounts during the final declaration process.
Form 64-8 is an HMRC tax form that authorises an agent to act on your behalf.
‘MTD-compatible’ means that a piece of software is able to meet all the demands of HMRC’s current MTD rules. With MTD for ITSA and MTD for Corporation Tax yet to be introduced, this currently means that the software meets all the demands of MTD for VAT. FreeAgent is an example of MTD-compatible software.
MTDfB stands for Making Tax Digital for Business. MTDfB concerns all parts of the MTD initiative that affect limited companies, partnerships, sole traders and landlords.
MTDfI stands for Making Tax Digital for Individuals. MTDfI concerns digitisation of the tax system for individual taxpayers who usually pay tax through PAYE.
MTD for VAT
Making Tax Digital (MTD) for VAT is the first major phase in the Making Tax Digital initiative. From 1st April 2019, VAT-registered businesses with turnover above the VAT threshold have been required to store digital records and submit VAT returns via accounting software that meets HMRC’s requirements.
The scope of Making Tax Digital for VAT is expanding. VAT-registered businesses with a taxable turnover below the VAT threshold will need to follow MTD rules for their first VAT return starting on or after April 2022. Even if you already submit VAT returns digitally - through FreeAgent, for example - you will still need to:
- sign up for MTD
- connect your FreeAgent account to HMRC
- follow a slightly different process to file your VAT return
Here’s a complete guide on how to get ready for your first MTD VAT return from FreeAgent.
With open authorisation, or ‘OAuth’, technology you can securely grant websites and applications access to information that’s held in an online account without the need for a password. OAuth 2.0 is the technology that will enable accounting software to access the information in your HMRC online account.
Obligations, or obligation periods, describe the periods of time for which taxpayers must provide information on their income and expenses under MTD for ITSA rules.
The timing of each taxpayer’s obligations are based on the quarterly dates of their accounting period. For example, a sole trader whose accounting year runs from 6th April to 5th April of the following year will have to submit four quarterly updates. In this example, the sole trader’s obligation periods will be:
- 6th April - 5th July
- 6th July - 5th October
- 6th October - 5th January
- 6th January - 5th April
Personal Tax Account (PTA)
A Personal Tax Account (PTA) is an online HMRC account from which individuals can access information about their tax liabilities. This includes information like tax codes, benefits payments and tax paid through PAYE.
Two-step verification (2SV)
Two-step verification (2SV) is a system used to make logging into an online account more secure. In order to log into a system with 2SV you’ll be required to provide an additional piece of information after you’ve entered your user name and password. This is often a code that’s either generated by another app or sent to your mobile phone.
2SV is used to confirm your identity when you connect MTD-compatible software with your HMRC account. HMRC will send a six-digit code to your mobile or landline which you’ll have to enter to grant the software permission to interact with HMRC on your behalf. You may also need to confirm your identity by answering some security questions.
An update period is a period of time within an obligation. It can vary in length from a single day to a whole obligation period but it can’t run across more than one obligation period. You can submit a summarised version of your income and expense data for these update periods and provide it as either a single update or as several small updates.
That covers the majority of the terminology you’re likely to encounter on the topic of Making Tax Digital. Now that you’re fluent in the language, why not take a look at how signing up to FreeAgent can make the transition to digital tax as painless as possible.