Making Tax Digital Jargon Buster

As an accountancy practice, we are on a mission to make Making Tax Digital as simple as possible. This glossary provides straightforward definitions of common terms associated with Making Tax Digital to support better understanding across all related content.

Accounting Software

Computer programs used to process financial transactions, store financial data, and automate bookkeeping and accounting tasks.

Agent

A person authorised to manage tax affairs and communicate with HMRC on behalf of a business.

Agent authorisation

The process of granting permission for an agent to handle specific tax services on behalf of a business or individual.

Agent services account

An online account used by agents, such as accountants or bookkeepers, to access HMRC’s digital services for Making Tax Digital.

Annual Summary

A yearly report showing business allowances and adjustments, categorised for tax purposes.

Application Programming Interface (API)

Technology that allows digital systems to exchange data. In Making Tax Digital, APIs enable accounting software to communicate with HMRC.

API-enabled spreadsheets

Spreadsheets capable of connecting to APIs, allowing integration with accounting software under Making Tax Digital.

Automated Data Transfer

A type of digital link that transfers data directly between software systems in compliance with HMRC requirements.

Bridging software

Software that connects spreadsheet data to HMRC systems, allowing digital VAT submissions.

Business Tax Account

An online HMRC account where businesses can access and manage their tax information.

Client

A business or individual who engages the services of an accountant or bookkeeper.

Cloud-based accounting software

Accounting software hosted online, allowing secure access to financial data from any location.

Designatory data

Designatory data includes specific business details that must be maintained digitally under Making Tax Digital. This includes information such as the business name, principal place of business, VAT registration number, and any VAT accounting schemes used.

Digital link

A connection between software systems that enables the transfer of data under Making Tax Digital requirements.

Digital audit trail

A record of every step in a financial transaction, allowing traceability from source data to submitted tax returns.

Digitalisation

The use of digital technology to automate processes, in line with HMRC’s Making Tax Digital strategy.

Digital records

• A digital record refers to the digital version of information that you can view on a computer, tablet or phone screen. Under the MTD rules, businesses must store specific information in a digital format on a computer or in the cloud using HMRC-approved software
• MTD’s requirement for digital record keeping means businesses can no longer solely rely on keeping their records in paper form. Examples of digital records that businesses will need to store under MTD include;
• Company name
• Address
• VAT registration number

Digital tax account

An online HMRC account used to manage tax affairs, including both Business Tax Accounts and Personal Tax Accounts.

Domestic reverse charge

A VAT accounting procedure designed to prevent fraud by shifting the responsibility for VAT reporting to the customer in certain transactions.

Final declaration

The final declaration is the process in which compatible accounting software consolidates all the necessary data to report to HMRC and determine your tax responsibilities for a particular year under Making Tax Digital (MTD) for Income Tax. If you collaborate with an accountant or bookkeeper, they may make adjustments to the accounts during this final declaration process.

Flat Rate VAT Scheme

Under the Flat Rate VAT scheme, businesses pay a fixed percentage of their total turnover as VAT. The specific amount paid varies based on the type of business, as different industries have different flat VAT rates. This scheme aims to simplify the VAT return process for businesses.

Form 64-8

Form 64-8 is an HMRC tax form that authorises an agent to act on your behalf. This form is used when a business owner wants to give permission for an accountant or another representative to manage their tax affairs and correspond directly with HMRC.

Government Gateway Account

A Government Gateway Account is the online portal used by business owners to communicate with HMRC. It is created when you first register for a government online service and allows access to various HMRC services, including Making Tax Digital.

HMRC

His Majesty’s Revenue and Customs (HMRC) is the UK government department responsible for the collection of taxes. HMRC oversees the implementation and management of the Making Tax Digital initiative, driving the shift towards a fully digital tax system.

HMRC API

The HMRC API (Application Programming Interface) facilitates the exchange of data between software systems. It allows third-party accounting software to integrate with HMRC, enabling businesses to send tax information and updates directly to HMRC in compliance with Making Tax Digital.

HMRC-recognised MTD Software

HMRC-recognised MTD software, also known as 'functionally compatible software,' is the type of software that businesses must use to comply with Making Tax Digital. This software enables businesses to maintain digital records and communicate with HMRC through an API.

MTD

MTD is the abbreviation for Making Tax Digital, a government initiative to digitalise the UK tax system.

MTD-compatible

MTD-compatible or MTD-Compliant software meets all the necessary requirements set out by HMRC under Making Tax Digital. This means the software is capable of storing digital records and communicating with HMRC through an API. FreeAgent is an example of MTD-compatible software.

MTD exemptions

MTD exemptions refer to the specific cases in which businesses or individuals are excluded from the digital requirements of Making Tax Digital. Exemptions may apply to those with disabilities, those living in remote areas, or businesses whose religious beliefs prevent them from using computers.

MTDfB

MTDfB stands for Making Tax Digital for Business. This is the umbrella initiative for all aspects of MTD that apply to businesses, including MTD for VAT, MTD for Income Tax, and MTD for Corporation Tax.

MTD for ITSA

MTD for ITSA (Income Tax Self Assessment) is a component of the Making Tax Digital initiative, set to apply to self-employed individuals, sole traders, and landlords with an income above £50,000 from April 2026. It requires these taxpayers to report income and expenses digitally.

Making Tax Digital for Corporation tax

Making Tax Digital for Corporation Tax is an upcoming phase of the Making Tax Digital programme. Although it is not yet mandatory, it will eventually require businesses to submit corporation tax returns and manage their tax records digitally. We will publish updates when further details are announced.

MTD penalties

MTD penalties refer to the new system of fines introduced by HMRC for late tax submissions and payments under Making Tax Digital. From January 2023, a points-based penalty system replaced the previous VAT penalty system, which was based on a percentage of the tax owed.

MTD for VAT

Making Tax Digital for VAT is the first major phase of the Making Tax Digital initiative. It requires certain VAT-registered businesses to maintain digital records and submit VAT returns electronically using MTD-compliant software. The scope of MTD for VAT expanded on 1st April 2022, applying to all VAT-registered businesses.

OAuth

OAuth (Open Authorisation) is a technology that allows you to securely grant access to websites or applications without sharing usernames or passwords. In the context of MTD, OAuth is used to enable accounting software to access data from your HMRC account securely.

Online Agent Authorisation

Online Agent Authorisation (OAA) is the service used to allow an agent to manage your tax affairs through their Government Gateway account. This service ensures that agents can act on behalf of a business and handle tax-related matters with HMRC.

Obligations

Obligations, or obligation periods, refer to the timeframes in which taxpayers are required to report their income and expenses under Making Tax Digital for Income Tax. These obligations typically align with a business’s accounting periods and may require quarterly updates for certain taxpayers.

Personal Tax Account

A Personal Tax Account (PTA) is an online account with HMRC where individuals can access information about their personal tax liabilities. This includes details such as tax codes, benefits payments, and PAYE information.

Soft landing period for MTD

The soft-landing period for Making Tax Digital was a transitional phase where businesses had additional time to comply with MTD for VAT without facing penalties. This period ended in April 2021, after which full compliance was required.

Tax Gap

The Tax Gap is the difference between the amount of tax that should be paid to HMRC and the amount that is actually paid. This gap can occur due to errors, underreporting, or evasion. Making Tax Digital aims to reduce the tax gap by simplifying and improving the accuracy of tax reporting.

Taxable turnover

Taxable turnover is the total value of taxable supplies made by a business, excluding VAT. This figure is important for determining whether a business must register for VAT and, consequently, whether it must comply with Making Tax Digital for VAT requirements.

Time of supply or tax point

The time of supply, or tax point, refers to the date when a transaction takes place for VAT purposes. This is the date used to determine when VAT should be accounted for and reported to HMRC.

Two-step verification

Two-step verification (2SV), also known as multi-factor authentication (MFA), is a security process that requires users to provide additional information, such as a code sent to a mobile device, after entering their username and password. 2SV is used when linking MTD-compatible software with HMRC to ensure secure access.

Update period

An update period is a defined time period within an obligation period during which a business submits updates on income and expenses. It can range from a single day to the full obligation period but must not span across multiple obligation periods.

VAT account

A VAT account is a record that businesses must keep under Making Tax Digital for VAT. It contains details of a business’s VAT transactions and is used to calculate and submit VAT returns to HMRC.

VAT threshold

The VAT threshold is £90,000, as of April 2024. Businesses with taxable turnover above this threshold must register for VAT and comply with Making Tax Digital for VAT rules. Businesses under this threshold are not required to register for VAT, but may choose to do so voluntarily.

VAT retail schemes

VAT retail schemes are simplified methods for calculating VAT for retail businesses. They include schemes such as the Point of Sale Scheme, Apportionment Scheme, and Direct Calculation Scheme. These businesses must maintain digital records of daily gross takings under Making Tax Digital for VAT.

VAT652 form

The VAT652 form is used by businesses that operate retail schemes to report the total daily gross takings. This information must be kept digitally under Making Tax Digital for VAT and submitted as part of the VAT return process.

Zero rated vat items

Zero-rated VAT items are goods or services that are still subject to VAT, but the rate charged is 0%. Businesses must still account for zero-rated items in their VAT books and disclose them on their VAT returns under Making Tax Digital.

VAT notice 700/22

VAT Notice 700/22, published by HMRC in 2018, explains the rules and requirements for Making Tax Digital for VAT. It outlines what businesses need to do to comply with the MTD for VAT regulations, including the need to keep digital records and use compatible software.

This glossary provides an essential guide to the key terms associated with Making Tax Digital. We hope this has helped clarify some of the terminology you may encounter as you navigate the digital tax system. As always, we are here to help simplify the process for you, ensuring that you meet your tax obligations with ease.