Creating the Tax Digital Threshold: VAT, Income Tax and Corporation Tax

All VAT-registered businesses must now comply with Making Tax Digital (MTD) for VAT.

But when are the next steps to make tax digital coming?

In this article, find out who needs to comply with MTD for VAT, MTD for Income Tax Self-Assessment (also known as MTD for ITSA and MTD for Income Tax) and MTD for Corporation Tax .

We also look at their various ranges so that you can be MTD ready in no time.

Here’s what we cover in this article:

Tax Digitization The tax is intended to streamline, improve accuracy and efficiency while making the entire process behind taxation easier for taxpayers and the government to manage.

HMRC says there have already been tangible benefits from the MTD for businesses that have adopted it.

But MTD is happening in phases and applies diverse group based on different thresholds.

As the government is starting tax digitization in a phased manner, there are different MTD deadlines for businesses.

All VAT-registered businesses are now required to file their VAT returns under the MTD rules.

From April 2026, MTD comes into play for ITSA,

This will mean that sole traders and landlords will need to file their income tax return under the next stage of the MTD if their income exceeds £50,000. Thereafter the MTD for ITSAs will apply to those earning more than £30,000 from April 2027.

And, as early as 2026, eligible firms may be required to start using MTD for corporation tax purposes.

You can view a full MTD timeline In our MTD Hub,

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MTD for VAT stands for Digital VAT Record Keeping and Adoption MTD-Compatible Software To provide your VAT return to HMRC.

HMRC says MTD for VAT Has already helped many businesses eliminate paper and manual processes, and reduce time spent on admin.

The process has generally made VAT returns more accurate and easier to complete.

MTD for VAT Limit

All VAT-registered businesses must now comply MTD rule.

MTD for VAT exemption

HMRC says you can apply For exemption from MTD for VAT if it is not reasonable or practical for you to use computer, software or internet.

Typically, this may be due to your age, disability, location or religion.

However, this is done on a case-by-case basis, and HMRC says it will consider any reason why you feel it is not appropriate or practical to adopt the MTD.

In practice, you would need a very strong argument for HMRC to grant you an exemption.

What do I do if I am VAT registered?

If you are VAT registered, you need to follow MTD rules for VAT.

If you don’t pay by direct debit, sign up at least three days before your withdrawal is due.

For those who already pay by direct debit, it’s best not to sign up too close to your return due date. You don’t want to end up paying twice.

If you are a direct debit payee, HMRC advises that you should not sign up less than seven days before your return is due or more than five days after your return is due.

HMRC will introduce a cap on MTD for ITSAs, with the first phase starting in April 2026 and the second phase starting in April 2027.

means sole trader and landlords People with business or property income of more than £50,000 will need to adopt the MTD for their income tax return from the first deadline.

If you fall into one of these groups as part of MTD, you will need to maintain a digital record of your business income and expenses.

MTD means you will need to send quarterly updates to HMRC using software that is functionally compatible with MTD.

This way, HMRC will have an up-to-date picture of your earnings and costs.

The quarterly reports will be business-wise and will be prepared again with period-end statement (EOPS) per business. After this you have to submit your final declaration which is person wise all your income, expenses, adjustments and allowances received together.

HMRC says that trusts, estates, trustees of registered pension plans and non-resident companies will be exempt from the MTD for ITSA, at least when it first comes into force.

HMRC has not proposed a minimum turnover threshold for MTD for corporation tax, and it is not yet clear what types of businesses will be included in that phase of tax digitalisation.

While the MTD for corporation tax is still some way off and in the planning stage, the government hopes to start a voluntary pilot to introduce MTDs for businesses incorporated in 2024 as a legal requirement, with 2026 at the earliest .

This means that incorporated businesses may eventually be required to keep digital records detailing their income and expenses through MTD compatible software, Digital Entries which will help generate reports which will be sent to HMRC every three months.

These quarterly reports will also form the basis of annual corporation tax declarations of the firms.

What is the limit of making tax digital?

All VAT-registered businesses must file their VAT return for VAT through the MTD, regardless of their taxable turnover.

In addition, two thresholds will apply to sole traders and landlords – above this level, they will have to switch to MTD to declare income tax from employment and rental income from 2026 (£50,000 and over) and 2027 (£30,000 and over) would be required.

Who is exempted from making tax digital?

HMRC says it will consider making an exemption from the need to comply with the MTD rules in exceptional circumstances.

For example, your location may mean that you cannot get internet access, or a disability may make it impractical to follow the MTD rules.

What is included in the turnover for VAT threshold?

VAT taxable turnover is the total value of each item you sell that is not exempt from VAT during the 12-month rolling period.

You should include the value of goods you have rented or loaned to customers, business goods used for personal reasons, goods you have exchanged/part-exchanged or gifts you have received from businesses in other countries. Services received that you had to ‘reverse charge’ and construction work your business has done for itself in excess of £100,000.

You should only exclude VAT-exempt sales and the value of goods or services you supply overseas.

Editor’s note: This article was first published in November 2021 and has been updated for relevance Delay in making tax digital for income tax,

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