Hentons logo
banner image


3 min read
author image
By : Simon Gray

Ready or not, Making Tax Digital (‘MTD’) will be here as early as this year! 

I’ll be honest with you, we’re worried that business owners either don’t fully understand what they need to do, or underestimate the work required to comply.

So let’s back-up a bit – what is MTD?

It’s essentially the government’s reaction to the digital revolution that’s already having far-reaching consequences in business, society, the government and our economy.

HMRC have been engaged in a channel shift for the past decade, moving from face-to-face and postal contact with taxpayers, to call centres and digital channels.  

MTD is the next step in this process.

The model requires the majority of businesses to report figures quarterly.  This reporting will be submitted digitally, so all facts and figures need to be entered into compatible software that HMRC will gain access to. 

This shift to more regular submission of your business performance data to HMRC is designed to narrow the so called ‘Tax Gap’, which is a fundamental objective of MTD.  HMRC believe that the current regime, where they find out about a businesses’ performance sometimes up to a year after the businesses’ financial year end is simply too long to wait.

In addition to the compliance burdens on Companies and Partnerships, individuals will also be affected by MTD. In theory HMRC will no longer need to issue a tax return to individual taxpayers as they will have all the personal data already on file! This data will be stored online at HMRC’s website known as a ‘Digital Tax Account’.

The source of the individual information held, being a combination of extracts from the business quarterly submissions (e.g. dividends paid to Directors) and the likes of financial institutions being obligated to automatically provide HMRC with details of taxpayers bank interest for example.

Also, this pre-population changes the trust dynamics – right now HMRC have to trust that you filled the information in correctly, after MTD you’ll have to trust that HMRC have filled it in correctly; so you will still need assistance in checking what HMRC have on you in your pre-populated digital tax account. 

Making Tax Digital affects everything in terms of how you manage your business finances.

This hasn’t come out of the blue - in the UK we’ve steadily incorporated technology into our tax administration, with 99% of VAT returns, 86% of personal and 98% of business taxes being filed online.

Our payroll tax system has already been overhauled with Real Time Information (RTI) – the requirement to update HMRC (and pay PAYE) along the same timeline that you pay employees.  This system was put into place to reduce the amount of over and under payments at the end of the year and according to the HMRC sources has raised additional billions of pounds for the Exchequer, thereby closing the Tax Gap. No doubt the success of RTI is a direct cause of the introduction of MTD

How long will it be before HMRC also request quarterly payments in addition to submitting information?

The upshot is you’ll be filing six sets of trading extracts per year -five to HMRC and one to Companies House. HMRC: quarterly plus an ‘annual adjusting return’ designed to ‘tidy up’ what was submitted in the previous 4 quarters and one to Companies House – well you will still need to prepare the annual ‘statutory accounts’ to be filed with them every year.

The  deadline for the quarterly submissions will be one month after each quarter.  This means there will be no more sitting on information until your annual submission rolls around – the new regime will be much more onerous and time consuming. 

So, what do you need to do to get ready?

Firstly, and most urgently, is to move to a cloud-based business accounting software system. Making this switch means your data will be stored safely online in the right digital format to simplify submitting your digital returns and linking your financial systems to HMRC’s online system.

Proactive tax planning will also become much more important, because we can’t wait until year end to decide what changes to make, we need to plan ahead, implementing tax planning both at the start of your financial year and throughout.

Having said all this, there are still a lot of unanswered questions; such as around how the HMRC portal will function and how you’ll connect to it, but one thing is for sure – MTD is coming, it’s coming fast, and you need to be ready!

*HMRC define ‘The Tax Gap’ as the difference between the amount of tax collected and the amount of tax they believe is owed.


For detailed insights

Find out more

contact us

back to top