Making Tax Digital: Embracing XML Technology for HMRC Compliance

Making Tax Digital (MTD) is HMRC’s plan to digitise the UK tax system for VAT, Income Tax (Self Assessment) and Corporation Tax for both businesses and individuals. MTD aims to make tax returns simpler and more efficient for everyone. Similar programmes are in progress around the world, for example in the US, where National Financial Awareness Day on August 14th will be used to promote this innovation. A key requirement of MTD is that businesses keep digital records of their financial transactions using MTD-compatible software. This software must use appropriate XML and iXBRL (Inline eXtensible Business Reporting Language) tagging of data items for transmission to HMRC within quarterly tax returns.

VAT

From April 2022, it became compulsory for all VAT registered businesses to submit their VAT returns digitally using MTD-compatible software.

Income Tax (Self Assessment)

From April 2026 and April 2027, it will become compulsory for landlords and the self-employed with income above a certain low threshold to submit their self-assessment income tax returns digitally using MTD-compatible software.

Corporation Tax

From 2026, it will become compulsory for companies to submit their corporation tax returns digitally using MTD-compliant software. Although the majority of UK companies have been required to file in iXBRL format since 2010, most groups still use manual processes to extract, transform, and load data into tax compliance software.

XML and (i)XBRL

XML (Extensible Markup Language) is a markup language and file format for storing, transmitting, and reconstructing any type of data. It defines a set of rules for encoding data or documents in a format that is both human-readable and machine-readable. It works by adding “tags” to data items which can be read by the appropriate software in order to identify the meanings of those data items according to some pre-defined schema. These tags can be rendered invisible to human viewers so as not to compromise readability. Many different XML schemas or grammars have been developed over the years, each devised for a particular application. XBRL is one such XML grammar and is used for the reporting of business data.

XBRL involves the application of computer-readable tags to business data. This enables the data to be processed automatically by software, bringing great gains in efficiency and providing an opportunity for high quality analysis of business information. A company’s financial statements, which have been converted into inline XBRL (iXBRL), may appear unchanged to a human reader, but they will contain tags, usually hidden to the eye, which can be accessed and used by software. XBRL can provide an identifying tag for each individual item of business data. For example, ‘operating profit’ has its own unique tag, as does ‘current assets’.

XBRL is a world-wide standard, developed by an international, non-profit making consortium, XBRL International Inc. (XII). XII is made up of many hundred members, including government agencies, accounting firms, software companies, large and small corporations, academics and business reporting experts. XII has agreed the basic specifications which define how XBRL works.

The XBRL format being used in the UK for company reporting is known as inline XBRL or iXBRL. This consists of a human-readable report, which has XBRL tags embedded in it. The human readable text is effectively HTML – the basic language of the web. The web file contains the XBRL tags, but they are usually hidden and are only displayed to human eyes when required by software – for example during a process to check the tags.

Benefits of Using XBRL

The introduction of XBRL tags enables automated processing of business information by computer software, cutting out laborious and costly processes of manual re-entry and comparison. Computers can treat XBRL data ‘intelligently’: They can recognise the information in a XBRL document, select it, analyse it, store it, exchange it with other computers and present it automatically in a variety of ways for users. XBRL greatly increases the speed of handling of financial data, reduces the chance of error and permits automatic checking of information.

Inline XBRL (iXBRL) offers additional benefits as it presents XBRL data in a human readable form, either on screen or in printed output. It also enables the author’s branding and layout to be maintained so that the recipient can view the same document the author created, whilst the computer can ‘intelligently’ recognise the embedded XBRL tags.

HMRC will benefit from much more effective analysis software, cutting out unnecessary queries and helping to deliver better automated risk assessment so they can focus resources on businesses where the compliance risks are greatest. In addition, HMRC and Companies House will achieve major improvements in the speed and efficiency with which they handle business data. Both will cut out manual processes and handling of paper.

As iXBRL becomes established, many companies may find that they can benefit from using XBRL to improve internal processes. XBRL has many potential benefits for businesses. By upgrading systems to utilise XBRL they can streamline and automate their methods for collecting, assembling, monitoring and reporting business data across their whole operation. They should be able to integrate disparate data systems. They can also turn internal management reporting and external reporting into processes which are fast, efficient and cost-effective.

Companies may want to discuss the exploitation of these benefits with their accountants and software and system providers. Consumers of financial data, including banks and other financial institutions, investors and analysts, can receive, find, compare and analyse data much more rapidly and efficiently if it is in XBRL or iXBRL format.

Case Studies

HMRC has published a number of case studies on their website showing how various companies have utilised the requirements of MTD to improve their business processes. Many of these smaller companies were using the traditional system of paper records and manually completed spreadsheets for their accounting procedures. Data then had to be manually re-entered into their reporting software in order to prepare their tax returns to HMRC. These POTI (Print Out, Type In) interfaces were inefficient, time consuming and error prone. Switching to MTD-compliant software for recording financial data streamlined their processes, increased accuracy and gave access to real-time data. Some user comments are shown below:

• Garage owner: “My accountant provided me with an innovative Making Tax Digital solution, which really helped me by reducing the time I needed to spend on VAT returns – time which I have little of.”
• IT consultant: “Making Tax Digital simplifies running a business in an increasingly online world and I can’t imagine doing it any other way.”
• Accountant: “Working closely with our clients, we ensure a smooth transition and teach the benefits of the system, including less paperwork, more accurate bookkeeping and the availability of real-time tax information.”
• Dentist: “My Making Tax Digital software has enabled me to not only keep on top of my bookkeeping, but it has allowed me to collaborate with both my business partner and my accountant to input data, track my finances and spending, produce monthly payments and organise payroll for my employees. On top of this, the biggest benefit to me is the 24/7 access it allows, I can access it anytime and from anywhere.”
• Gardening equipment supplier: “We found switching to Making Tax Digital also gave us the additional benefit of being able to access up-to-date financial figures, giving us a daily handle on our business’ finances and performance, that wasn’t there previously. Making Tax Digital has made the submission process so simple and we find it really comforting to receive an instant acknowledgement from HMRC when we submit our VAT return.”

Next Steps: MTD-Compliant Software

In order to comply with current and future HMRC regulations, it is essential that businesses and some individuals keep all their financial records in digital form. Data transfer between applications must be via “digital links”, that is there must be no manual intervention required which could lead to errors.

Many companies already keep their business records in a digital format using software. However, not all business software is MTD-compatible, in particular it may not use the correct, HMRC-compliant XML/XBRL tagging for items of financial data. The difference with Making Tax Digital for Income Tax compatible software is that it will be capable of:

• maintaining business records as set out in the regulations
• preparing and sending quarterly updates and end of period statements using the information maintained in those records
• finalising a company’s business income and submitting its declaration after the end of the tax year
• communicating with HMRC digitally through their application programming interface (API) platform

HMRC maintains a list of currently available MTD-compliant accounting software packages on its website. As an alternative, it is possible to carry on using simple spreadsheets to keep accounts and then to use “bridging software” to carry out the required data tagging. This software may be installed in-house or used via online conversion services provided by third parties. However, this approach requires a certain amount of manual intervention in order to associate the correct HMRC tags with the correct data items. This job only needs to be done once though, so may be more cost-effective for small businesses.

For many businesses and individuals, the preparation of Income Tax Self-Assessments, VAT Returns or Corporation Tax Returns (CT600) may be an iterative process. Where this is the case, automating the identification of changes between successive versions could be extremely useful. As these documents are generated in an XML-based format, automated comparison requires software which understands the structure of XML files. For this application, a tool such as DeltaXML’s XML Data Compare provides an ideal solution.

The Future of MTD

Corporation Tax

Legislation, which came into force on 1 January 2010, means that, since 1 April 2011, it has been compulsory for companies to file their Company Tax Returns online using iXBRL for accounts and computations. Almost all companies, therefore, now use Final Accounts Preparation (FAP) software, which automatically adds iXBRL tagging to data items for transmission to HMRC and Companies House. The “look & feel” of company reports to human readers is unchanged since the iXBRL tagging is all done “behind the scenes”. However, it may be desirable in some circumstances to check the iXBRL form of the report and, in this case, XML-aware comparison software could be an essential tool.

VAT

Making Tax Digital for VAT was first launched for those with a taxable turnover above the VAT threshold (£85,000 per annum) in April 2019. Businesses needed to have signed up to Making Tax Digital for their first VAT return starting on or after 1 April 2022. They may not have been required to make their first submission via Making Tax Digital until Summer 2022.

All businesses are required to keep digital records under Making Tax Digital. This can be done through software. Where a business chooses to use bridging software, digital links must be in place to ensure that records are kept digitally as information is transferred between different platforms. All VAT registered businesses are now required to keep digital records and to file tax returns using compatible software. HMRC has a list of approved software packages on its website.

HMRC will sign up all remaining businesses to Making Tax Digital for VAT automatically unless they are exempt or have applied for exemption.

Income Tax (Self Assessment)

The government intends that Making Tax Digital (MTD) for Income Tax will eventually apply to most people who are self-employed and/or receive property income.

It was due to become mandatory for those with annual gross income of £10,000 or more from April 2024 but the government announced in December 2022 that they would be allowing more time for both businesses/landlords and HMRC to get prepared for the introduction of the new programme.

Therefore, the timetable for mandatory compliance with the MTD rules is now as follows:

• From April 2026 for those with annual gross income of over £50,000
• From April 2027 for those with annual gross income of between £30,000 and £50,000

For those are self-employed and receive property income, the gross annual income figure above applies to total gross income from both sources.

From April 2026, self-employed individuals and landlords with an income of more than £50,000 will be required to keep digital records and provide quarterly updates on their income and expenditure to HMRC through MTD-compatible software. Those with an income of between £30,000 and £50,000 will need to do this from April 2027.

As is the case for VAT and Corporation Tax, it is allowable to use spreadsheets and bridging software to prepare MTD-compliant tax returns, so long as the applications use digital links with no error-prone manual intervention.

Conclusion

HMRC’s Make Tax Digital initiative is just part of a worldwide trend towards digitising financial and taxation reporting. For example:

• In the US, all companies must file iXBRL to the SEC (Securities and Exchange Commission).
• In Japan, over 9,000 listed companies and investment funds use iXBRL to submit financial statements to the Japan Financial Services Agency (JFSA).
• In Denmark, the Danish Business Registrar has collected over 100,000 iXBRL formatted financial statements for the purposes of registration and market information.
• ESMA, the European Securities and Markets Authority obliges public companies that report in IFRS (the vast majority of EU financial statements) to use iXBRL.

So, it is vital that companies everywhere embrace XML/XBRL technology as essential to their continuing operation. In addition, in the UK, landlords and the self-employed have less than 2 years to prepare for submitting their self-assessment tax returns in XML format. Many sources of guidance are available online and a good place to start in the UK is at the government’s dedicated website.