The HM Revenue and Customs (HMRC) is looking to do away with manual income tax submission through the new Making Tax Digital (MTD) system. Your business may be required to adopt MTD in your tax filing process within the next few years.
While this system was announced as early as 2021, many business owners still don’t understand its implications. Unfortunately, this could result in penalties when the official rollout begins in April 2026.
In this guide, we’ll cover everything you need to know about HMRC’s MTD requirements, from who it applies to when it will take effect. Let’s get started!
What is HMRC’s Making Tax Digital Mandate?
Making Tax Digital is part of HMRC’s broader initiative to digitise the UK tax system. The goal is to replace traditional, paper-based processes with a more streamlined, digital approach. With HMRC MTD, the government hopes to reduce administrative burdens, improve accuracy, and decrease the risk of tax evasion or fraud.
HMRC requires every qualifying business to use approved software for record-keeping and filing returns. This streamlined tax filing system will ensure that information is submitted directly to HMRC promptly and efficiently.
Key Deadlines for MTD Compliance
The initial phase of MTD implementation was expected to be in April 2024, but the government changed the dates to accommodate all stakeholders. So, when should your business transition to HMRC’s Making Tax Digital? That will depend on your income.
The first major deadline is in April 2026. If your business has an annual income of over £50,000, you must adopt MTD for that period’s income tax. This date marks the start of the official rollout, with sole traders and landlords within this income bracket expected to have HMRC-approved software to maintain digital records and file their tax returns.
A second phase is set for April 2027, extending the requirement to those earning over £30,000 annually.
What if your business’s income is below the £30,000 threshold? The government will review all small businesses within that bracket to determine their needs and how the MTD service can be adjusted to fit them.
This is part of the government’s phased approach to implementing MTD more widely across the UK. It’s important to note that these deadlines are fixed, so businesses in these income categories must begin planning their transition to digital reporting well in advance.
How to Prepare for MTD
MTD is a new experience for many businesses in the UK. But it doesn’t need to be a challenging transition, especially if you start preparing today. How do you go about that?
The first step is ensuring your business uses compatible digital record-keeping software and submits tax returns. HMRC requires companies to maintain accurate, up-to-date records using software that integrates with its systems. To avoid unnecessary regrets, check if your selected candidate is on the list of HMRC-approved software before committing.
Next, focus on setting up a digital record-keeping system for your business. That means electronically tracking all your income, expenses, and receipts, reducing errors that could lead to penalties. With accurate, up-to-date records, you can streamline the tax submission process.
Staying informed about HMRC’s MTD guidelines and monitoring all updates will also help you prepare. Consider consulting a tax advisor who can help guide you through the process and ensure you’re fully compliant when the time comes.
As part of your preparation, consider signing up voluntarily for MTD to test the system before it becomes mandatory. This strategy will allow you to familiarise yourself with the process and address any potential issues ahead of time.
Penalty System for MTD
Under the Making Tax Digital mandate, the UK government introduced a new penalty system to encourage timely compliance with tax reporting requirements. The system aims to simplify the penalty structure, aligning it with the existing penalties for VAT.
As part of the MTD framework, businesses that fail to meet submission deadlines will face a more streamlined penalty process, which could include fines for late submissions or payments.
The new penalty system is points-based, meaning businesses accumulate points for each late submission. A financial penalty will be triggered once a certain threshold of points is reached. This encourages consistent compliance, and the system is designed to be both fair and transparent.
It’s important to note that the new penalty system will only apply to businesses once they are mandated to join MTD. However, companies that voluntarily adopt MTD before the official mandate are still subject to the existing self-assessment penalties for late filings.
Looking Ahead
The government has delayed the mandate of MTD by a couple of years, but it’s happening. If your business’s income meets the £50,000 threshold, you should be ready to digitise your taxation on April 2026. Those earning £30,000 have only one extra year to prepare and avoid penalties.
Investing in compatible software and familiarising yourself with the new system are among the things you need to do before the deadline. The best way to understand how MTD works and future-proof your business is by voluntarily signing up before it becomes mandatory.
