Why Making Tax Digital (MTD) will continue under the new Labour government

Now that we have a new Labour government some people may be hoping to have seen the end of Making Tax Digital (MTD), the system that will require income tax records to be kept digitally and submitted to HMRC quarterly.

All the indicators are, though, that there will be no change to this project, which sees the biggest shake up of the tax system since the introduction of self-assessment nearly 30 years ago. Labour campaigned on reducing the tax gap and increasing productivity so the signs are that MTD is here to stay. 

2026 will see the introduction of MTD for landlords and for sole traders meeting certain income thresholds. So is this a case of Big Brother is watching you?  Some people have certainly seen it as a negative step intended to scrutinise business affairs and place a greater administrative burden on hard-working individuals and landlords who, it is fair to say, have seen increasing levels of regulation and a reduction of tax reliefs in recent years. 

MTD means that transactions need to be linked seamlessly from initial recording through to the final submission to HMRC.  This doesn’t mean that HMRC will be looking at every transaction, but it potentially gives them the ability to analyse data on a very large scale and compare profit margins in like industries, for example.   

Through its Connect program, HMRC already has the ability to link transactions together. For example, stamp duty paid on a property may indicate that someone has made a sale and should be disclosing it for capital gains tax purposes. This is why we would encourage all of our clients to consider our Tax Investigation Service (TIS), to cover the costs of HMRC enquiries as they get more information and opportunities to ask questions.   

In reality HMRC is still struggling to deal with some of the basics, like answering the phone, so HMRC investigations as a direct result of MTD data may not happen for a while. At this stage, the main aim of MTD seems to be just getting taxpayers to use a system and to record data regularly. This has worked well with MTD for VAT, bringing in £185m a year in extra revenue through relatively simple changes in behaviours which increase the accuracy of VAT records. 

Rather than fighting against it we should embrace the change and make it work for us. Using off the shelf systems for recording, storing and reporting business or property data can help cut down on paperwork and help better manage your business. Technology can be beneficial if it allows you to take payment on site, save time filing invoices or dropping off records to the accountant.  Chasing debts and managing reminders to get a gas safety inspection are all made easier through these types of tools. 

The key message has to be to take your time to familiarise yourself with the options available to you and learn how to get the best out of them now rather than when change is imminent.  If you are prepared now you won’t be adversely affected when quarterly reporting comes into effect and you will be able to run your business more efficiently. 

What you can do now: 

• Find out what is available to you now and get the right software in place 

• Learn what software can do for you and get some training if necessary. 

• Get a separate bank account to increase efficiency and reduce the amount of detail visible to HMRC on non-business transactions.

If you would like any further information, please get in touch with a member of our team who would be happy to help.