What is Making Tax Digital (MTD)?

What does MTD actually require?

Two things. Records must be kept digitally — in software, or at minimum in a spreadsheet that links digitally to software — rather than on paper or reconstructed from a bank statement at the deadline. And returns must be submitted from that software through HMRC's interface, so that the figures flow from the records without being copied by hand.

For VAT this has been the position for every registered business for some years. The nine boxes of the return are populated from the digital records and sent from the software; logging into HMRC's site and typing them in is no longer an option.

For income tax the regime is different in shape: sole traders and landlords above an income threshold keep digital records, send a summary update each quarter, and then make a final declaration at the year end in place of the Self Assessment return. The thresholds and start dates have been revised more than once, so check where you sit on gov.uk rather than relying on any figure you remember.

What does it look like in practice?

A self-employed decorator keeps his records in software with a bank feed. Each invoice he raises and each receipt he photographs is recorded as it happens. Nothing about that is new; it is just bookkeeping done at the time rather than in January.

When a quarter ends, the software already has the totals: say £14,200 of income and £5,800 of expenses. If he is within MTD for Income Tax, he reviews those figures and sends the quarterly update from the software. No tax is calculated and none is paid at that point; it is a summary, not a bill.

At the year end the four quarters are pulled together, any adjustments made — a mileage claim, a capital allowance on the van — and the final declaration submitted. The tax due is worked out then, and paid on the usual Self Assessment timetable.

What changes for the business, and what does not?