Making Tax Digital for VAT, limited companies, and partnerships

Making Tax Digital (MTD) is the UK government's bold program to digitise tax reporting, with the goal of simplifying the process and cutting down on errors.

While Making Tax Digital for VAT (Value Added Tax) has been fully established since 2022, the rules for Income Tax Self Assessment (ITSA), partnerships, and corporation tax have faced major delays and changes. This guide cuts through the complexity to give you a definitive, up-to-the-minute breakdown of the Making tax Digital initiative for all key business entities.

What you need to know about Making Tax Digital

Making Tax Digital for VAT is currently live and required for all VAT-registered businesses (unless you’re exempt or have applied for exemption). Any new VAT-registered businesses will automatically be set up for Making Tax Digital by the HMRC. If you're VAT-registered, complying with these new rules is essential to avoid penalties.

What is Making Tax Digital for VAT?

The initiative requires VAT-registered businesses to keep digital records of their transactions and submit VAT returns directly to HMRC using Making Tax Digital-compatible software. The goal is to make easy compliance a reality by cutting out manual steps. This mandatory process is managed through HMRC’s Making Tax Digital VAT-compatible software. The old HMRC portal is no longer an option for non-exempt businesses.

Who is affected?

Since April 2022, Making Tax Digital has been mandatory for all VAT-registered businesses, regardless of their taxable turnover (including those who voluntarily registered below the £90,000 threshold).

The digital record-keeping requirements

To comply, your digital records must include:

• Your company’s details (name, address, and VAT number).

• Details of all sales and purchases (the exact date when the transaction legally occurred, value excluding VAT, and VAT rate).

• The output VAT due (the total amount of VAT that you have charged) and the input VAT claimable (the total amount of VAT that you have paid).

You must store and preserve this information digitally for at least six years.

Keeping digital links

The "soft-landing" period for digital links ended for most businesses in April 2021. This means you must have digital links in place now—it's a critical compliance point.

What this means: Data transfer between two or more pieces of software (e.g., from a spreadsheet to bridging software) must be automated. Manually copying and pasting or re-typing figures is strictly prohibited, as this is where human error creeps back in.

Compliance solution: Use a single, fully Making Tax Digital-compatible cloud accounting system, or link your existing software or spreadsheets using HMRC-recognised bridging software.

Making Tax Digital for Corporation Tax and limited companies

This area has seen the biggest policy shift. Making Tax Digital for limited companies must be aware of the current status regarding corporation tax (CT) while remaining vigilant about their VAT obligations.

Is Making Tax Digital for corporation tax scrapped?

Yes, for the foreseeable future, it is. HMRC officially confirmed they do not intend to introduce a mandatory Making Tax Digital for Corporation Tax (MTD CT) rollout following policy reviews, but do intend to develop an approach that is suited to the diverse needs of Corporation Tax population. This bold decision allows HMRC to focus resources on the phased rollout of Making Tax Digital for Income Tax Self Assessment (ITSA). 

Impact on limited companies

• Corporation tax filing: Limited companies will continue to follow the existing process for filing their corporation tax returns (CT600) and company accounts with HMRC and Companies House. The requirement to keep digital records and submit quarterly updates for Corporation Tax has been abandoned.

• VAT compliance: If a limited company is VAT-registered, it remains fully subject to Making TAx Digital for VAT rules (as detailed above).

Making Tax Digital for partnerships

The rules for partnerships are split: if they are VAT-registered, they must comply with Making Tax Digital for VAT, but the income tax rules have been postponed.

Making Tax Digital for Income Tax (ITSA) delay for partnerships

• Current status: The original plan to bring general partnerships into Making Tax Digital for Income Tax Self Assessment has been postponed indefinitely by HMRC.

• Timeline: There is no planned start date yet for any type of partnership, including Limited Liability Partnerships (LLPs) and complex partnerships. HMRC will announce a new timeline later.

What might be expected for Making Tax Digital for partnerships

When Making Tax Digital for partnerships eventually begins, the requirements are expected to mirror those for sole traders:

• Digital record-keeping of income and expenses.

• Submitting quarterly updates of summary data to HMRC.

• Filing an End of Period Statement (EOPS) and a final declaration for the partnership's income, all via Making Tax Digital-compatible software.

Future-proof your plans

To ensure your business is compliant and future-proofed, use this essential checklist:

Disclaimer: Tax legislation is subject to change. Always consult with a qualified accountant or tax professional for advice tailored to your specific business circumstances.