Making Tax Digital: 8 common myths busted
Confused about Making Tax Digital (MTD)? Don’t worry, we’re here to shed some light on the initiative and separate fact from fiction.
Myth 1. Making Tax Digital rules don’t apply to anyone yet
The first major phase of the initiative, MTD for VAT, came into effect on 1st April 2019. Under MTD for VAT rules, businesses with VATable sales above the VAT threshold have to keep digital records and submit quarterly VAT returns using MTD-compatible software.
From April 2022, VAT-registered businesses with a taxable turnover below the VAT threshold will also have to follow the MTD rules.
The scope of MTD will then extend to Income Tax under Making Tax Digital for Income Tax Self Assessment (MTD for ITSA). From 6th April 2024, self-employed business owners and landlords with annual incomes above £10,000 will have to store records digitally and submit updates using MTD-compatible software.
Partnerships with individuals as partners will have to follow the rules from April 2025. Limited liability partnerships (LLPs) and partnerships with corporate partners will be required to join at a future date yet to be announced.
Making Tax Digital for Corporation Tax is expected to be the next phase in the initiative. HMRC has advised that MTD for Corporation Tax rules won’t come into effect until at least 2026.
Myth 2. Making Tax Digital is hugely unpopular
A change as big as MTD is bound to bring out strong opinions on all sides, but evidence points to many people feeling positive about the initiative.
A government evaluation of Making Tax Digital shows that 1.4 million businesses had signed up for MTD for VAT by March 2020. This figure includes 270,000 VAT-registered businesses with VATable sales below the VAT threshold that signed up for MTD voluntarily.
Myth 3. A digital tax system will be too technical for most people
Millions of businesses already manage tax online via a digital tax account and 94% of Self Assessment tax returns were filed online in 2020.
However, if you have not yet signed up for Making Tax Digital, HMRC provides advice and support that will make navigating the change as simple as possible.
Myth 4. My spreadsheet is just as good as any digital tax software
Spreadsheets are great for some tasks, but MTD-compatible accounting software can offer so much more. For example, as well as providing features such as tailored business insights, time-saving automation and a real-time view of your finances, FreeAgent gives you access to a friendly support team who are on hand to help with your queries.
Statistics show that the majority of spreadsheets contain errors, and these aren’t always easy to spot or rectify. Using accounting software can help you improve the accuracy of your bookkeeping, and can make it easier to track changes to your accounts.
Myth 5. HMRC will provide me with free software
HMRC does not provide software for Making Tax Digital. MTD-compatible software is only available from dedicated third-party providers such as FreeAgent.
If you have a business current account with NatWest, Royal Bank of Scotland or Ulster Bank NI, you get full access to FreeAgent free of charge for as long as you retain your account. FreeAgent is also free with a Mettle account if you make at least one transaction per month with Mettle.
Myth 6. Making Tax Digital means I’ll need to keep extra records
HMRC has confirmed that businesses following MTD for VAT rules do not need to keep any more records than they did previously, nor provide any more information to HMRC.
In its 2020 evaluation of MTD for VAT, HMRC noted that some businesses had already reported benefits including saving time, a reduction in input errors and productivity gains.
MTD for ITSA will come into effect in April 2024. After this date, affected taxpayers and businesses will have to:
- send quarterly updates on their business income and expenses to HMRC using accounting software
- complete an end of period statement for each source of business income
- finalise their end-of-year tax position in a final declaration
Despite the introduction of quarterly updates, affected businesses won’t have to provide any information that wouldn’t currently be included in a Self Assessment tax return. What’s more, using accounting software can actually help simplify your record keeping by allowing you to digitally store records of your business income, expenditure, expenses and other information in the software.
Myth 7. Digital record-keeping is going to be a huge hassle
It might take a bit of time to get used to new software, but when you do you’ll reap the rewards. In FreeAgent’s 2020 survey of small business owners, customers reported that switching to FreeAgent’s accounting software saved them seven and a half hours a month on average, compared to their previous bookkeeping method.
Being able to see your tax liabilities build up over time in FreeAgent helps to give you a clear picture of your business finances, while the software automates time-consuming daily admin such as sending late-payment reminders. By the time MTD for ITSA comes into effect, FreeAgent will also enable affected taxpayers and businesses to manage their quarterly updates, End of Period Statements and final declarations and file them directly to HMRC from the software.
Myth 8. Switching to digital accounting is going to be incredibly stressful
HMRC’s research has shown that for many businesses, the transition to MTD for VAT has been easier than expected. One business owner quoted in HMRC's 2020 report said: “Initially [it’s] a little overwhelming but [after] the first month or two, you suddenly realise that the process is so simple.”
Find out more about the steps you’ll need to take to prepare for MTD for ITSA if you're a business owner or landlord who is affected by the upcoming changes.