What does Making Tax Digital mean for contractors?
Making Tax Digital, the government’s initiative to implement a fully digital tax system in the UK, is set to bring about the biggest change to the UK tax system in recent times. Here, award-winning accounting software provider, FreeAgent, explains what this means for contractors.
What is Making Tax Digital?
Making Tax Digital (MTD) is the government’s initiative to implement a fully digital tax system in the UK, whereby taxpayers are required to keep digital records and use MTD-compatible software to make electronic tax submissions.
HMRC is currently in the process of a phased rollout of the initiative. It began in 2019 with MTD for VAT and will continue in 2024 with the introduction of MTD for Income Tax.
MTD for VAT: already in effect
‘MTD for VAT’ requires all VAT-registered businesses to keep digital records and submit VAT returns using MTD-compatible software, like FreeAgent. MTD for VAT was introduced in April 2019 for VAT-registered businesses with a turnover of £85,000 or more, and was extended in April 2022 to include all VAT-registered businesses.
If you’re either self-employed or the director of a personal service company (PSC) and your business is VAT-registered, you should already be complying with MTD for VAT and filing VAT returns through compatible software.
MTD for Income Tax: coming in 2024
If you’re a sole trader or a landlord with a combined business and/or property income of more than £10,000 a year, MTD for Income Tax (also known as ‘MTD for Income Tax Self Assessment’ or ‘MTD for ITSA’) will come into effect for you in April 2024.
It means that you’ll need to use software to keep digital records and make regular tax submissions to HMRC. Instead of sending a Self Assessment tax return to HMRC once a year, you’ll be required to use compatible software to submit four quarterly updates about your business income and expenses. At the end of the tax year, you’ll also be required to send an end of period statement and a final declaration, which will replace the annual Self Assessment tax return.
For partnerships with individual partners, MTD for Income Tax will come into effect in April 2025.
It’s not yet known when MTD for Income Tax will apply to limited companies, so if you’re operating as the director of a PSC you’ll be required to continue filing annual tax returns under the current Self Assessment process.
Find out more about ContractorUK's accounting software partner FreeAgent here.