Making Tax Digital – another delay [updated]

Last Updated on 13 July 2024

Originally posted July 2020. Updated to include delayed implementation date.

HMRC have announced how they’re intending to move to digital tax reporting under their Making Tax Digital project (MTD).

In some ways the announcements are not that surprising. They’ve been talking about MTD for years. I’ve banged on about it many times.

Reporting VAT via MTD is already compulsory for any VAT-registered business.

What’s new is their timetable for making all businesses MTD-complient.

You can read a version of this Q&A on the Arts Professional Magazine website (Sept 2022):
https://www.artsprofessional.co.uk/magazine/article/qa-what-does-making-tax-digital-mean-freelancers

From 1st April 2022 – all VAT-registered businesses have to use special MTD-compatible software to file VAT returns.
Read more here on gov.uk

From 6th April 2026 [updated 19 December 2022 – was originally 2024] – sole traders (and landlords) with an annual turnover greater than £50,000 will have to use MTD-compatible software to report income and business-related expenses every three months.

HMRC have been referring this this as “Making Tax Digital for Business” or “Making Tax Digital for Income Tax”. You’ll also see references to “MTD of ITSA” (Income Tax Self Assessment)

The government has been consulting on introducing MTD for corporation tax for limited companies. It won’t be before April 2026 “at the earliest”.

How does this affect freelancers?

Any freelancer who is a sole trader with turnover more than £50,000 needs to start thinking about how they will keep track of expenses as they go along.

I’ve been recommending this for 15 years now, using a spreadsheet – download it here >.

When MTD kicks in it will be compulsory to keep records of turnover and expenses in real time. But you’ll also need to use MTD-compatible software, which will report to HMRC every three months at the touch of a button.

Where do I get the software from?

There are some software packages on the gov.uk website that are already authorised, although you probably haven’t heard of many of them.

The long answer is: there will likely be dozens of software packages that will go for authorisation between now and 2026. This will include big ones like QuickBooks, Xero and FreeAgent which have all got MTD in their sights.

But they cost money??

Yes, at the moment they do. I have no problem with the concept of digitising tax. But I think it’s a bit much to charge people for paying their taxes.

The government says two things which I would take with a pinch of salt:

“the set-up cost for a business is estimated at £209 per business”
“there will be free software packages”

A one year subscription for existing bookkeeping software is often more than £209, and this new MTD system will require us all to subscribe year on year. That’s a lot of money across the life of a business.

On top of the that, the commercial software makers have responded to the ‘free software’ comment with a curt ‘yeh- right’. This is because they are businesses and need to make money.

But I can ditch my accountant and replace her with an app now?

Not necessarily. Although HMRC talks about this software as ‘cloud accounting’, it’s actually ‘cloud bookkeeping’.

Many software companies won’t be able to give you accounting advice, and even if they did they might not know about the intricacies of freelancing in production industries.

Will there be a backlash, riots in the streets and mass disobedience?

Well, the Daily Telegraph is apoplectic (£), as this measured and restrained headline demonstrates:

But I suspect not. Many small businesses will adjust quite quickly, as long as they can get online.

I’ve been using the kind of software that will be used for MTD for nearly three years now. It’s slick and makes record keeping easy because you can use an app on your phone as well as online.

I’ve also started using it to do VAT reporting, which saves me time.

The cost is the big problem, and will be a very big problem for some freelancers. But 2026 isn’t here yet. By the time it’s compulsory we might have some good deals to bring the market price down.

Personally I would make MTD software 100% tax deductible, but no one ever asks me.

It’s a government IT system. Will it crash and burn?

This is the fourth or fifth implementation date set by HMRC for MTD for sole traders. It was meant to come in on 6 April 2018, so you could legitimately claim it’s 6 years late already.

Ironically, if it had been in place before the pandemic, HMRC could have supported all sole traders using the SEISS. Instead they only supported those who’d been in business and submitted tax returns from two years before.

But HMRC are gung-ho about it. They say it will bring in more tax. They will also be able to use computers as tax inspectors.

It’s going to happen folks.