Making Tax Digital changes and things you need to know

In the ever-shifting taxation landscape, HMRC has recently introduced two big changes in the journey towards the digitisation of tax in the UK. After weeks of consultations with organisations and professional bodies, Making Tax Digital (MTD) for income tax has been delayed for an additional two years until at least April 2026. HMRC has also decided to stagger compulsory entry into the scheme rather than maintain the original strategy of bringing everyone under the same rule simultaneously.

Grouping accidental sole traders in with intentional and professional ones was impractical and it had become evident that a delay was on the cards. Consequently, the move has brought with it a clear sense of relief for those in the accountancy industry. But what does it mean for businesses?

HMRC will not have taken this decision lightly and clearly didn’t feel that the original deadline was fit for purpose. But whilst the premise behind the delay is clear, when HMRC makes these announcements, it tends to provoke more questions than answers. Questions which HMRC will be under pressure to answer before the new deadline, such as clarification over who will be impacted and when.

Another issue not yet addressed is around basis periods – a major sticking point. As a sole trader you can choose your year-end, but MTD requires reporting at the end of March/beginning of April. There isn’t any logic in having a year-end in one period and then reporting on it in another – the dates need to line up. HMRC hasn't stated how it will implement this, which may be more problematic for businesses than the data collection itself. It could generate scenarios where companies are paying tax on 18, 19, 20 months’ worth of income rather than 12, and even situations where businesses are reporting on data that hasn’t even happened yet.

So, what are the implications of MTD for Income Tax?
Provided these grey areas are clarified, there is no doubt that the end goal of MTD for Income Tax will still be hugely worthwhile to business owners, sole traders and landlords. What HMRC needs to focus on communicating is how it is planning to use the data gathered to benefit businesses.

MTD for income tax will undoubtably have the same effect as MTD for VAT did for ushering companies into the digital regime. For sole traders who are currently using their bank account as the only gauge of their financial standing and battling with piles of paperwork, MTD will allow for a much more uniform and structured method of approaching their businesses’ finances via real-time data. The change will allow for a steadier stream of information and knowledge around a businesses’ tax liabilities, enabling clients to see what tax is owed quarterly rather than facing a hefty and unexpected tax bill at the end of the year which they may struggle to pay.

For landlords too there are clear advantages. With changes to mortgage tax allowances and shifting regulations around tenancies, there is a great deal of information to keep abreast of. By moving onto a digital platform, landlords can help to ensure that they have all the data they need to make informed decisions and navigate these changes.

We’re also hoping to see software companies using this delay to improve their service offering and capabilities, giving clients the best possible choice of options to suit their needs and budget, when they do eventually digitise.

The government need to utilise the breathing space to speak to accountants and businesses on the ground, to decipher what the real issues are and iron them out before the 2026 deadline.

At Monahans we work hard to ensure that we are ahead of the curve on new developments, and although these HMRC changes are out of our hands, we ensure our clients have the most up to date information on how they may be impacted. We’ve already identified numerous clients who will substantially benefit from the digitisation of their systems, so whilst it’s not yet compulsory to do so, we are keen to showcase the advantages now.

As mentioned previously, the use of systems such as Xero and data capture tools, as well as gaining comprehensive insights into cash flow, all work to shape a business owners’ understanding of the organisation’s accounts and its tax liabilities. Businesses should use these two extra years to prepare for MTD rather than delay the inevitable. It is up to accountants to show the benefits that go above and beyond simply ticking the MTD box.

We also have a Making Tax Digital for Income Tax Self-Assessment - what you need to know PDF for you to download here.

We will be providing more information as and when we have it so please keep reviewing our articles and reading any emails you receive from your client manager. If you need support with your MTD accounting, please get in touch with me or one of my colleagues today, and we’d be more than happy to help.

Clare Bowen