Tag: MTD

Budget, Other

Chancellor mandates e-invoicing by 2029

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The government will require electronic invoicing for all VAT invoices for business-to-business and business-to-government transactions from 2029.

The government has used its 2025 Budget to announce the long-anticipated arrival of electronic invoicing (e-invoicing) to the UK.

In a short update in the Budget report, the government stated that to “drive productivity further”, it will require the use of e-invoicing for all VAT invoices for business-to-business and business-to-government transactions from 1 April 2029.

Responding to a consultation launched back in February this year, the government today said it would be conducting “extensive stakeholder engagement from January 2026 to ensure stakeholder views and concerns are considered throughout the policy development process”. 

It is expected that a final decision on the exact details of the system will be published at the 2026 Budget.

What is e-invoicing?

E-invoicing is the direct digital exchange of invoice data between buyers’ and suppliers’ systems in a standard format. It is not simply emailing a PDF, Word doc or image to another person or business.

Similar to the government’s Making Tax Digital (MTD) programme, software is required to send e-invoices. While specialist e-invoicing point solutions are available, accounting packages such as Sage and Xero have established capabilities in anticipation of a potential move.

E-invoicing pros and cons

Proponents of e-invoicing point to its ability to process invoices faster and with fewer errors, cut out invoice duplication, avoid fraudulent activity such as criminals intercepting invoices and changing bank details, and allow for a more streamlined audit and reporting process.

A Sage report published last year, based on interviews with 9,000 European small businesses, found that adopting e-invoicing can lead to annual savings of around €13,500 by nearly halving the time spent processing invoices, while Avalara’s research claims it could unlock nearly £9bn for the UK economy.

Widespread adoption of e-invoicing in the UK could also provide HMRC with more information it can use to close the gap between tax owed and tax collected. E-invoicing has proved largely successful in combating VAT evasion in South America, while Italy claims benefits of more than €4bn a year since introducing e-invoicing in 2019.

However, critics point to the additional administration and cost burdens placed on businesses forced to purchase, learn and use external software to comply, particularly for smaller organisations or those that send or receive relatively few invoices.

Phased approach ‘sensible’

Alex Baulf, Avalara’s VP of global indirect tax and e-invoicing, called the rollout a sensible move that gave UK companies a chance to embed e-invoicing as a business-as-usual process before adding tax reporting.

“The government doesn’t want to rock the economy or bring business to a standstill with the move from paper or PDF to e-invoicing,” he said. “With a four-corner model, the government doesn’t have to build any infrastructure to start with, and can look to phase in real-time reporting at a later date.”

For Richard Asquith, CEO of VATCalc, the move feels like an “efficiency drive” to ensure adoption, rather than an all-out drive to cut the tax gap.

“They appear to have gone light with the measures, just mandating exchange of e-invoices between businesses to ensure efficiency without imposing e-reporting to HMRC,” he said. “HMRC was burned by MTD for VAT, where it wanted an API-enabled ability to peer into businesses’ digital records and had to row back on that, so they don’t want to repeat that experience any time soon.”

Asquith added that the move towards standardised data and formats is not only what the industry tends to want, but also reflects HMRC’s preference for accounting packages to take care of the infrastructure side of things.

DMS Posts, Tax

Making Tax Digital delay: everything you need to know

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In this short guide, we’ll explain what the Making Tax Digital (MTD) delay means for businesses, accountants, and bookkeepers, and why you should still prepare for the legislation now.

What is the Making Tax Digital delay?

In December 2022, HMRC announced a delay in Making Tax Digital for Income Tax. Instead of launching in April 2024, the first phase of MTD for ITSA will begin in April 2026, for sole traders and landlords earning above £50,000. You can read the full statement to parliament here.

What is the new start date for MTD for ITSA?

Based on HMRC’s latest announcement, MTD for ITSA will follow a phased approach from April 2026.

Sole traders and landlords earning above £50,000 will need to comply with ITSA rules from April 2026.

Sole traders and landlords earning above £30,000 will follow in April 2027.

Our Making Tax Digital timeline includes information on all other MTD start dates.

Why was MTD delayed?

According to HMRC, MTD for ITSA was delayed to ease the pressure on businesses given the current economic climate. It was also stated that the delay would give businesses more time to adapt to new ways of working.

What changes have been made to MTD for ITSA?

HMRC will now introduce MTD for Income Tax with a phased approach, with multiple income thresholds.

From April 2026, sole traders and landlords earning above £50,000 annually will need to follow ITSA rules.

From April 2027, sole traders and landlords earning above £30,000 annually will follow.

General partnerships and smaller businesses earning less than £30,000 annually are yet to be mandated. We’ll be sure to report on this as soon as the dates are announced.

Has the MTD penalty system been delayed?

Taxpayers will be subject to the new Making Tax Digital penalty system once they’re mandated to join MTD.

For VAT-registered businesses already filing MTD for VAT returns, the new penalty system is already in place.

When sole traders and landlords earning above £50,000 are mandated for MTD for ITSA in April 2026, they will also be subject to the new penalty system.

Is Making Tax Digital going to happen?

Absolutely. Despite the slowdown in pace, digital transformation is still the direction of travel.

Making Tax Digital can help businesses run more efficiently, use resources more effectively, and save time on day-to-day admin. But right now, businesses are facing considerable challenges in light of economic uncertainty and will benefit from a little extra time to prepare.

Pushing the deadline back gives businesses and accounting practices more time to get confident about the legislation and learn how to use cloud-based accounting software to improve their overall business health.

Who is affected by the MTD for ITSA delay?

Self-employed individuals and landlords are impacted by the MTD for ITSA delay.

Sole traders and landlords earning above £50,000 annually will need to comply with ITSA rules from April 2026. Sole traders and landlords earning above £30,000 annually will follow in 2027.

General partnerships and those earning below £30,000 annually are yet to be mandated.

All this means is that the earliest ITSA rules will be mandated is April 2026 – so businesses, accountants, and bookkeepers have plenty of time to learn the new system and find ITSA-compatible software.

It’s also worth bearing in mind that, whilst thresholds have been established, you can voluntarily sign up to MTD for ITSA at any point once a public sign up process has been established and you’re using MTD for ITSA approved software.

Should you still prepare for MTD for ITSA now?

Definitely. Businesses, accountants, and bookkeepers should see the delay as an opportunity to find the right tools and hone their digital skills ahead of the deadline. Instead of pressing pause on your MTD preparations, use this time to learn how you can reap the most rewards from cloud-based software.

Don’t miss out on the benefits of digitalisation

Embracing digitalisation isn’t just about MTD compliance – tools and software can help you run a healthier business by demystifying your financial position with forecasts, reports, and live feeds.

Accountants and bookkeepers will also be able to provide real-time advice and guidance based on live data in their clients’ software. So both accounting practices and businesses benefit from having clear and accurate data, thanks to cloud-based software.

What’s more, some cloud-based accounting software packages allow you to integrate multiple tools and platforms. So you can join the dots between all kinds of business functions – such as project management, payroll, and financial planning. This means less hopping between tabs and more time spent focusing on your business.

Tax

MTD for VAT rules will apply to all VAT-registered clients from 1st April

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On 1st April 2022, Making Tax Digital (MTD), the government’s initiative to implement a fully digital tax system within the UK, will reach a new milestone: all VAT-registered clients will be required to follow MTD for VAT rules. 

What are the rules?

MTD for VAT requires affected clients to keep digital records and file their VAT returns through MTD-compatible software like FreeAgent. Currently, only VAT-registered clients with a turnover above the VAT registration threshold of £85,000 a year are required to follow MTD for VAT rules.

What’s changing?

From 1st April 2022, all VAT-registered clients, regardless of turnover, will be required to follow MTD for VAT rules, and the option to file VAT returns through HMRC’s website will no longer be available. 

The estimated 1.1 million business owners who will be affected by this change, they will need to start using MTD-compatible software to: 

  • store their business records digitally
  • send their VAT returns to HMRC
DMS Posts

MTD ITSA delayed to 2024

Debonair Management Services Limted

by Rebecca Cave

Delayed

The government has delayed the start of MTD ITSA to 6 April 2024, with MTD for general partnerships postponed to 2025. The change to the tax year basis has also been delayed until at least April 2024.

In a written statement to the House of Commons on 23 September 2021, it was announced that MTD for income tax self assessment (MTD ITSA) would be postponed yet again to April 2024. 

“We recognise that, as we emerge from the pandemic, it’s critical that everyone has enough time to prepare for the change, which is why we’re giving people an extra year to do so. We remain firmly committed to Making Tax Digital and building a tax system fit for the 21st Century” announced the new financial secretary Lucy Frazer. 

Long time coming

This is the latest in a series of delays and deferrals in the MTD programme, which was proposed by Chancellor George Osborne in late 2015. The MTD start date for small businesses was first planned to be in April 2018, then the focus switched to MTD for VAT. The MTD for income tax programme was to be delayed until lessons had been learnt from the VAT roll-out.

MTD for VAT commenced on time for most VAT registered businesses for VAT periods starting on and after 1 April 2019 but a number of “complex” entities had a deferred start date to 1 October 2019. A similar deferral is now in place for general partnerships (ie not LLPs, mixed or corporate partnerships), with those “ordinary partnerships” due to enter MTD ITSA from April 2025.

There is no indication of when other more complex partnerships will have to join MTD, and we don’t know if the MTD for corporation tax project will start as planned in 2026 or not.

What is the base year?

The turnover for mandation into the MTD ITSA regime remains at only £10,000 per year, much to disappointment of many who were lobbying for a much higher entry threshold.

As the turnover threshold must take into account the taxpayer’s income from all of their sole-trader businesses, plus their rental income, HMRC needs to pull together several figures from the taxpayer’s self assessment tax returns. Only when the tax return totals reach the £10,000 threshold will HMRC issue a notice to file under the MTD regulations.

If MTD ITSA was mandated from 6 April 2023, the turnover test would need to apply to the figures reported in the 2021/22 tax return, submitted by 31 January 2023, and possibly turnover reported in the 2021/22. Both of those years were affected by the pandemic which reduced turnover and rental income for many businesses and landlords.

Local authority grants for businesses liable for business rates would also increase business turnover for those periods. The SEISS grants should not have been included in business turnover, but some taxpayers have reported them as such, leading to HMRC having to make many corrections taxpayers’ self-assessments for 2020/21, and possibly also for 2021/22. 

As MTD ITSA will now start in April 2024 the base year for testing the MTD turnover threshold will be the tax year 2022/23. The turnover figures for that year should not be distorted by Covid-related grants, and hopefully will reflect normal trading beyond the pandemic for most businesses. 

Tax year basis

When the consultation on changing to the tax year basis of assessment was released in July 2021, doubts were raised on whether there was sufficient time to introduce such a fundamental change to tax law before the mandation of MTD ITSA.

It was apparent that HMRC wanted all unincorporated businesses to switch to the tax year basis before the introduction of MTD ITSA in 2023, but this would make 2022/23 the difficult transitional year.

For businesses with an accounting year end that doesn’t approximate to the tax year, more than 12 months of profits would be assessed in 2022/23. This would have a knock-on effect for a wide range of allowances and charges, including NIC, student loan repayments and capital allowances, to name a few. There was just not enough time to write amendments to regulations in all the areas affected before April 2022.    

What’s more using the tax year basis would bring forward the start of MTD ITSA for businesses with a 31 March year end, from 1 April 2024 to 6 April 2023 – which came as a big shock for many accountants and businesses.

The written statement from the new financial secretary to the Treasury, confirmed the change to the tax year basis will not come into effect before April 2024, with a transition year no earlier than 2023. The government will respond to the consultation on reforming basis periods “in due course” but the wording of this statement makes the change to the tax year basis look uncertain.

DMS Posts

MTD ITSA: Your questions answered – part 2

Debonair Management Services Limted

by Rebecca Cave

What are the basic requirements for MTD ITSA?

There are four requirements for MTD ITSA (draft reg 3):

  1. record business transactions in a digital manner
  2. preserve those records for the defined period
  3. provide a quarterly update to HMRC
  4. provide an end of period statement (EOPS) to HMRC 

The records in 1) and 2) comprise data needed to populate the reports required for points 3) and 4), which in turn must be submitted using MTD-compatible software.

The digital means for recording the data does not have to be the same software that submits the data. However, there should be a digital link between the recording software and the submission software. 

What exactly must be recorded?

Each transaction must have these data points recorded digitally:

  • the date of the transaction – the exact time is not required
  • for expenses – the category out of the specified list of expenses (see below)  
  • for income – the trade or property business the income relates to   
  • the amount or value. 

Retail businesses will be able to elect to record daily gross takings rather than every single transaction (draft reg 17), but only if it would be unreasonable for the business to keep digital records of every individual sale. 

In addition, the business will have to record the following permanent information as part of its digital records:  

∙ the business name 

∙ the address of the principal place of business 

∙ whether it uses cash accounting or accruals accounting

Can the client give their accountant paper records to enter into software? 

The taxpayer does not have to record the business data digitally themselves. They can pass this task over to a bookkeeper or to their accountant to make the entries into accounting software, or a spreadsheet.

Although the aim of MTD is to encourage businesses to record their business transactions in real-time, as they occur, there is nothing in the draft regulations that stipulates exactly when the data must be committed into the digital record. As long as the data for the quarter is recorded before the quarterly submission is compiled and sent to HMRC, there is nothing to prevent a bulk recording of transactions every few weeks or months.

However, the longer the delay between the transaction and being recorded digitally, the greater the risk of loss or corruption of data – which is the whole point of MTD (as HMRC would argue).    

Can a spreadsheet be the first entry for digital records?

A spreadsheet can be the entry point for transactional data into the accounting system. However, once that data has been recorded, the MTD regulations stipulate that there should be “digital links” that move the data around the accounting system. This means the data should not be retyped or copied by human hand once it has entered the system. 

Think about where the accounting system starts. That is the point the transaction (sale or purchase) is recorded. It may be convenient to capture transactions using optical character readers, or bank feeds, but that doesn’t have to be the entry point of all the data.  

A business can still issue paper invoices if the information from that invoice is digitally recorded in the accounting system.  

What information is required to be submitted quarterly?

The quarterly submissions will be the totals for the quarter of:

  • sales income for each trade
  • purchases/expenses for each category 

The categories of expenses are expected to be the same as those currently required in the self-employment section (form SA105) and property section (form SA103F) of the self-assessment tax return. More detail will be set out in the final MTD ITSA regulations.

In essence, the quarterly submission is a rough profit and loss account, no balance sheet figures are required. The data for individual transactions are not required.

Can the accountant make changes in the final submission?

This quarterly data dump does not have to be accurate, any misallocation between expense categories can be adjusted at the end of the period statement (EOPS).

It is in the EOPS that the accountant can make any adjustments for capital allowances, losses, reliefs, disallowable expenses, transactions that have been missed or double-counted.  

One EOPS will be required of each trade or property business by 31 January following the end of the tax year. 

Can the taxpayer submit estimated figures on the quarterly submissions?

Yes, if the taxpayer wishes to submit estimated expense figures, or even only the income amounts, in the quarterly submissions, that would be acceptable within the current draft MTD regulations. 

To avoid the risk of a penalty for late filing some form of data needs to be submitted each quarter.   

The quarterly submissions do not contain an accuracy statement. The taxpayer (or accountant) is not required to declare that the quarterly submission is a complete or correct reflection of the net or gross income of the business. 

The taxpayer must make a declaration of accuracy on the EOPS, once all the adjustments for the four quarters have been made.

What will HMRC do with the quarterly data?

The quarterly submission will be used by HMRC to calculate an estimate of the business’s tax liability throughout the year, and that figure will be reflected back to the taxpayer. This is likely to confuse rather than assist the taxpayer as the current timing of tax payments will not be changed (for now).

Will tax payments change to quarterly?

Earlier this year there was a Call for evidence: timely payment, which asked for ideas on how the payment of income tax under self assessment, and corporation tax for small companies, could move to more frequent payment dates based on in-year calculations.