Jump to:

Making Tax Digital (MTD) and CIS

In recent years, the UK government has introduced several reforms to modernise and streamline the tax system, with Making Tax Digital (MTD) being one of the most significant. It is important as a contractor or subcontractor to understand how MTD Impacts CIS. MTD aims to reduce errors in tax reporting and make it easier for businesses and individuals to maintain accurate records through the use of digital tools. By mandating the use of approved software for tax reporting, MTD intends to create a more transparent, real-time view of taxpayers’ obligations while reducing the administrative burden of manual record-keeping.

What is Making Tax Digital (MTD)?

MTD is a government initiative aimed at transforming the tax system by moving it online. The programme initially focused on VAT-registered businesses but is expanding to include other taxes such as Income Tax and Corporation Tax. By requiring businesses to use compatible software to manage their finances and submit their tax returns, MTD aims to eliminate common errors and improve the overall efficiency of tax reporting. The key features of MTD include:

Digital record-keeping: Businesses must maintain digital records of their transactions and tax data.
Use of compatible software: Tax returns must be submitted through HMRC-approved software, ensuring real-time reporting and reducing errors.
Real-time reporting: Instead of yearly submissions, MTD will eventually require businesses to provide more frequent updates, offering better visibility of tax liabilities throughout the year.

Since its rollout, MTD has primarily affected VAT-registered businesses with a turnover exceeding the VAT threshold. However, as it expands to include other areas of taxation, it will increasingly affect businesses across all sectors, including those in construction.

What is the Construction Industry Scheme (CIS)?

The Construction Industry Scheme (CIS) is a tax deduction system designed specifically for the construction sector. Under the scheme, contractors deduct tax from payments made to subcontractors and pay these deductions directly to HMRC. These deductions serve as an advance payment towards the subcontractor’s tax and National Insurance contributions.

CIS was introduced to ensure tax compliance within the construction industry, where cash transactions and subcontracting relationships can lead to underreporting of income. The scheme applies to a wide range of businesses involved in construction work, including self-employed individuals, partnerships, and limited companies.

Contractors: Businesses or individuals who pay subcontractors for construction work.
Subcontractors: Those who are paid to carry out construction work for a contractor.

The CIS requires contractors to:

Verify the status of subcontractors through HMRC.
Deduct a portion of the subcontractor’s payment (either 20% for registered subcontractors or 30% for unregistered ones) and send it to HMRC.
File monthly CIS returns to report these payments and deductions.

Failure to comply with CIS requirements can lead to penalties for both contractors and subcontractors, making accurate and timely reporting essential.

How MTD and CIS Intersect

Both MTD and CIS are part of HMRC’s broader initiative to modernise the UK tax system and reduce errors in tax reporting. For businesses operating within the construction industry, complying with both MTD and CIS adds a layer of complexity. While MTD demands digital record-keeping and software-based tax submissions, CIS requires the accurate calculation and reporting of tax deductions for subcontractors each month.

The introduction of MTD brings significant changes to how construction businesses handle their CIS obligations. Contractors and subcontractors must now ensure that their tax records are not only accurate but also digitised and submitted in a timely manner using approved software. This creates a dual compliance requirement that many construction firms, especially small businesses and sole traders, must navigate carefully.

The digitalisation of tax under MTD means that construction businesses must adapt their processes for CIS payments and reporting. This can involve integrating specialised software that caters to both MTD and CIS requirements, ensuring that all records are properly maintained and submitted without errors or delays.

In the next section, we will explore the MTD implementation timeline and its phases, detailing how and when construction businesses need to comply with the new digital tax rules.

MTD Implementation Timeline and Phases

As with any significant reform, Making Tax Digital (MTD) has been introduced in phases, with each phase targeting different sectors of the economy. The construction industry, particularly those under the Construction Industry Scheme (CIS), must take note of these timelines to ensure compliance. Since the CIS involves frequent tax deductions and monthly submissions, understanding how and when MTD will affect these obligations is critical.

Key MTD Phases to Date

MTD has rolled out progressively, starting with VAT-registered businesses and gradually expanding to include other tax types. Below is a brief overview of the key phases:

April 2019: MTD for VAT became mandatory for VAT-registered businesses with a taxable turnover above the VAT threshold of £85,000. These businesses were required to keep digital records and submit their VAT returns through MTD-compliant software.
April 2022: MTD for VAT was extended to all VAT-registered businesses, including those below the £85,000 threshold. This change brought more small businesses, including many operating in the construction sector, under the MTD umbrella.
April 2024 (Planned): MTD for Income Tax Self Assessment (ITSA) is set to be introduced. Initially, it will apply to self-employed individuals, including many subcontractors, and landlords with annual business or property income above £50,000.
April 2026 (Planned): The scope of MTD for ITSA will extend to businesses with income between £30,000 and £50,000.
Future Phases: MTD for Corporation Tax is expected to roll out after 2026, though specific dates have not yet been confirmed. This will impact limited companies operating under CIS, making digital record-keeping and submissions mandatory for corporate tax returns.

How MTD Affects CIS Businesses – Timeline Considerations

For construction businesses, including contractors and subcontractors under CIS, these timelines are crucial for planning and compliance. Let’s break down how each phase impacts businesses involved in construction.

MTD for VAT and CIS (April 2019 and 2022)

Most contractors and subcontractors will have already faced changes due to MTD for VAT. If your construction business is VAT-registered and your turnover exceeds the VAT threshold, you have likely been required to comply with MTD for VAT since 2019. However, as of April 2022, even businesses below the £85,000 threshold must comply with the digital VAT submission rules. This means that:

VAT returns must be filed using MTD-compliant software.
All VAT-related transactions must be recorded digitally, ensuring accurate, up-to-date records.

For CIS contractors, this phase would also have impacted how they handle VAT on subcontractor payments and material costs. Software solutions that integrate both VAT and CIS deduction management have become essential tools for ensuring compliance.

MTD for Income Tax (ITSA) and CIS (April 2024 and 2026)

While MTD for VAT focuses on larger construction firms, MTD for ITSA will have a more direct impact on smaller businesses and self-employed subcontractors. Here’s what to expect:

April 2024: MTD for ITSA will apply to subcontractors and contractors who are self-employed and have a turnover exceeding £50,000. These individuals will be required to:
- Keep digital records of their income and expenses.
- Use MTD-compliant software to submit quarterly income tax updates to HMRC.
- Provide an End of Period Statement (EOPS) and a final declaration to confirm income and tax liabilities for the year.
April 2026: The income threshold for MTD for ITSA will drop to £30,000. This means that a larger portion of self-employed subcontractors, many of whom operate on a project-by-project basis with fluctuating incomes, will need to transition to digital tax submissions.

For those registered under the CIS, this shift will significantly affect how they manage their tax returns. MTD for ITSA will require subcontractors to be more diligent in keeping track of their income and expenses, including the CIS deductions made by contractors. These quarterly submissions will offer more real-time insights into their tax liabilities but will also require careful record-keeping to avoid errors or omissions.

Future MTD for Corporation Tax

Although MTD for Corporation Tax is not expected until at least 2026, construction firms operating as limited companies must be aware of this upcoming phase. When it comes into effect, all limited companies under CIS will need to:

Maintain digital records for their corporation tax affairs.
Submit their corporation tax returns through MTD-compatible software.

This will likely coincide with more comprehensive digital tax management solutions, which can handle everything from VAT and CIS deductions to corporation tax reporting.

Key Dates for CIS Businesses to Keep in Mind

To ensure your construction business is fully compliant with MTD as it affects CIS, it’s essential to be aware of the following key dates:

April 2022: All VAT-registered businesses, including those under CIS, must comply with MTD for VAT.
April 2024: Self-employed subcontractors and contractors with income over £50,000 must comply with MTD for Income Tax.
April 2026: The income threshold for MTD for ITSA will reduce to £30,000.
Post-2026: MTD for Corporation Tax is expected to launch, affecting limited companies in the construction sector.

Failure to comply with these deadlines could result in penalties, so it’s important to act early and ensure that your business has the necessary systems in place to meet these requirements.

MTD Impacts CIS Contractors and Subcontractors

Making Tax Digital (MTD) has introduced significant changes to the way businesses in the UK manage their tax affairs, and for those in the construction industry operating under the Construction Industry Scheme (CIS), the impact is particularly notable. CIS contractors and subcontractors face unique challenges when complying with both MTD and CIS regulations, especially with the requirement to maintain digital records and use approved software for tax reporting.

This section will explore how MTD impacts contractors and subcontractors, focusing on the shift to digital record-keeping, software requirements, and the integration of MTD with existing CIS obligations.

Changes to Tax Filing Requirements for CIS Businesses

Before the implementation of MTD, many construction businesses, especially smaller contractors and subcontractors, relied on traditional methods of record-keeping such as paper ledgers, spreadsheets, and manual submissions. However, with the introduction of MTD, these businesses must now adapt to new digital tax reporting requirements.

For CIS-registered contractors and subcontractors, the following key changes now apply:

Digital Record-Keeping:
MTD mandates that businesses keep their records digitally. This means all invoices, payments, and CIS-related deductions must be stored and managed using MTD-compliant software. This is a shift from manual or spreadsheet-based systems to a fully digital platform, which should be able to store detailed financial records securely and in a format that can be easily submitted to HMRC.
Use of MTD-Compliant Software:
Under MTD, businesses are required to submit their VAT returns (and, in the future, Income Tax and Corporation Tax returns) through HMRC-approved software. For CIS contractors, this means using software that can handle:
- VAT reporting.
- CIS deduction calculations and payments.
- Monthly CIS returns to HMRC. For subcontractors, this software should be capable of tracking payments received, CIS deductions, and other expenses, ensuring all information is readily available for quarterly income tax updates when MTD for Income Tax Self Assessment (ITSA) is introduced.
Quarterly Reporting:
While MTD for VAT already requires businesses to submit VAT returns quarterly, MTD for ITSA will extend this obligation to include self-employed subcontractors. Instead of submitting one annual self-assessment tax return, subcontractors will be required to submit digital updates every quarter, providing HMRC with real-time insights into their income and tax liabilities.
CIS Monthly Returns and MTD:
Contractors in the construction industry must already file monthly CIS returns to HMRC, detailing payments made to subcontractors and the deductions applied. Under MTD, these monthly returns must now be integrated into digital platforms, ensuring accurate, timely reporting that aligns with other MTD obligations, such as VAT returns. The integration of CIS reporting into MTD-compliant software ensures that these two critical tax reporting processes are streamlined.

Digital Record-Keeping for CIS Deductions and Payments

Under the CIS, contractors must deduct 20% (or 30% for unregistered subcontractors) from subcontractors’ payments and submit these deductions to HMRC each month. The switch to digital record-keeping under MTD requires contractors to maintain accurate, up-to-date records of:

Payments made to subcontractors: This includes the gross amount paid, before CIS deductions, and the net amount after deductions.
CIS deductions: The specific amounts deducted from each payment made to subcontractors, which must then be paid to HMRC.
Verification of subcontractors: CIS requires contractors to verify their subcontractors’ status with HMRC to determine the correct deduction rate (20% for verified subcontractors, 30% for unverified ones).

Under MTD, all of these details must be recorded digitally and submitted via compatible software. Many MTD-compliant platforms offer integration specifically for CIS, ensuring that contractors can track subcontractor payments, apply deductions, and submit monthly CIS returns without needing to manage separate systems for MTD and CIS compliance.

For subcontractors, digital record-keeping means keeping track of payments received from contractors, ensuring that the correct CIS deductions have been applied, and maintaining detailed records of expenses related to their construction work. This is crucial when it comes to preparing for quarterly updates under MTD for ITSA, as subcontractors will need to provide accurate information on their income and expenses each quarter.

Software Requirements for CIS Contractors and Subcontractors

The most significant change for CIS businesses under MTD is the requirement to use MTD-compatible software for tax reporting. Not all accounting software is suitable for both MTD and CIS reporting, so choosing the right solution is critical.

MTD-compliant software should offer the following features:

VAT Returns: If the business is VAT-registered, the software must allow for the submission of VAT returns digitally to HMRC.
CIS Deductions and Reporting: The software should be able to handle CIS verification, deductions, and monthly CIS return submissions. Some platforms even allow for automatic CIS deduction calculation, reducing the likelihood of human error.
Income and Expense Tracking: Especially for subcontractors, the software must track all income and expenses in a way that prepares for quarterly tax updates.
Integration with HMRC Systems: The software must be capable of submitting all necessary tax data directly to HMRC in the required digital format.

Many popular accounting software providers have developed solutions specifically for businesses operating under CIS. These platforms simplify the complex process of managing CIS deductions while ensuring MTD compliance. Examples of MTD-compliant software that cater to CIS businesses include Xero, QuickBooks, Sage, and specialised CIS platforms like EasyBuild.

Impact on Monthly CIS Returns and Subcontractor Payments

Under CIS rules, contractors must file a monthly return with HMRC detailing all payments made to subcontractors and the deductions applied. Under MTD, this process must be done digitally through approved software. For contractors, this means:

Accurate Record-Keeping: All payments made to subcontractors and corresponding deductions must be recorded digitally, ensuring that monthly returns are accurate.
Timely Submissions: Monthly CIS returns must be filed by the 19th of each month. MTD-compliant software will automate this process, ensuring that contractors meet the deadline and avoid late filing penalties.
CIS Payment Reconciliation: Contractors must reconcile the payments they make to HMRC for subcontractor deductions with the amounts reported in their monthly CIS returns. Digital software that integrates both MTD and CIS will streamline this process, reducing the administrative burden.

For subcontractors, MTD compliance means ensuring that they have access to accurate records of all payments received, including CIS deductions. This is essential not only for verifying that contractors are applying the correct deductions but also for accurately reporting income to HMRC under MTD for ITSA.

Penalties for Non-Compliance

MTD introduces stricter rules for digital record-keeping and tax submissions, and failure to comply can lead to penalties. For CIS businesses, this means that failing to transition to MTD-compliant software or submitting inaccurate or late CIS returns can result in fines. Penalties can range from £100 for late submissions to more significant fines for persistent non-compliance or inaccurate reporting.

Additionally, contractors who fail to verify subcontractors or apply the correct CIS deduction rates can face further penalties, so ensuring that digital records are properly maintained and that all CIS returns are submitted accurately is critical.

Challenges for CIS Businesses Under MTD

While Making Tax Digital (MTD) promises many long-term benefits—such as improved accuracy in tax reporting and reduced administrative burdens—the construction industry, particularly businesses operating under the Construction Industry Scheme (CIS), faces unique challenges in adopting this system. From the complexities of cash flow management to the project-based nature of work, construction firms and self-employed subcontractors must navigate various obstacles to ensure they remain compliant with both MTD and CIS.

In this section, we’ll explore the key challenges construction businesses encounter when implementing MTD, particularly with regards to digital record-keeping and monthly CIS obligations.

1. Complexity of Cash Flow Management

Cash flow management is already a significant challenge for construction businesses due to the cyclical and project-based nature of work. For contractors and subcontractors, cash flow can be highly irregular, with periods of high earnings followed by times of limited or no income. This variability can make it difficult to maintain accurate, up-to-date financial records—something that is now essential under MTD.

Irregular Income and CIS Deductions

Subcontractors in the construction industry often face fluctuating incomes based on the completion of individual projects. This irregularity is further complicated by the fact that contractors are required to make deductions under CIS before paying their subcontractors. Managing these deductions and ensuring that income figures are reported accurately becomes more difficult when earnings fluctuate.

With MTD’s requirement for digital record-keeping and quarterly reporting for Income Tax Self Assessment (ITSA), subcontractors must be particularly careful to manage their cash flow effectively. For example, a subcontractor may receive several large payments one month, followed by little or no income in the next month. This variation in earnings needs to be accurately reflected in quarterly updates to HMRC, and digital software should track these fluctuations in real-time.

Delayed Payments and Cash Flow Strain

In the construction industry, payment delays are common. Contractors may face delays in receiving payment from clients, which in turn affects their ability to pay subcontractors. This can create cash flow problems, especially for smaller businesses, as they still need to maintain digital records and meet MTD deadlines, regardless of payment delays.

MTD doesn’t account for payment delays, which means that contractors must still submit accurate digital records and file their tax returns on time, even if their income or subcontractor payments are delayed. This can place additional financial pressure on businesses that are already struggling with cash flow management.

2. Project-Based Work and Record-Keeping Complexity

One of the hallmarks of the construction industry is its project-based structure, where businesses are often involved in multiple projects at the same time, each with its own set of contracts, timelines, and payment schedules. For contractors and subcontractors operating under CIS, keeping track of income, expenses, and deductions for each project is essential to ensure accurate tax reporting under MTD.

Managing Multiple Contracts and CIS Deductions

For contractors working on several projects simultaneously, keeping accurate records of payments made to subcontractors can be complex. Each project may involve multiple subcontractors, each with their own payment schedules and CIS deductions. This means that contractors must ensure their digital records are not only comprehensive but also organised in a way that allows them to track payments and deductions on a per-project basis.

MTD-compliant software can help by automating many of these processes, but contractors must ensure they choose a solution that is capable of handling multiple projects and subcontractors. The software should be able to integrate project management with CIS deduction tracking, so contractors can easily see what payments have been made, which subcontractors have been paid, and how much tax has been deducted on behalf of each subcontractor.

Complex Expense Tracking for Subcontractors

For subcontractors, managing expenses across multiple projects is a key challenge. Under MTD, subcontractors are required to keep digital records of all business expenses, from materials to tools and transportation costs. However, because subcontractors often work on different projects for different contractors, expenses can quickly become difficult to track.

Subcontractors must ensure that their expenses are correctly attributed to each project, and that they are maintaining accurate digital records of every purchase or expense. This can be particularly challenging for self-employed subcontractors who may not have dedicated administrative support and are managing their own books. Failing to track expenses accurately can lead to errors in quarterly updates under MTD for ITSA, potentially resulting in higher tax liabilities.

3. Transitioning from Manual Processes to Digital Record-Keeping

Many small and medium-sized businesses in the construction sector, particularly those run by self-employed individuals, have traditionally relied on manual record-keeping systems. From paper-based invoices to spreadsheets, these systems have allowed businesses to track income and expenses without the need for specialised software. However, MTD requires all businesses to transition to digital record-keeping, which can be a significant challenge for firms unfamiliar with digital tools.

Learning New Software and Technology

The transition to MTD-compliant software can be overwhelming for businesses that have not previously used digital accounting tools. Contractors and subcontractors may need to invest in new software, train their staff (or themselves) on how to use it, and ensure that their digital records are accurate. For smaller businesses or sole traders who are already stretched thin managing day-to-day operations, this learning curve can be particularly daunting.

The good news is that many MTD-compliant software platforms are designed to be user-friendly, even for those with limited experience in digital record-keeping. However, it’s essential that construction businesses choose software that can handle both their CIS obligations and the wider requirements of MTD, including VAT and income tax reporting.

Costs of Implementing Digital Solutions

For many construction businesses, the financial cost of implementing digital solutions may be another challenge. While some MTD-compliant software platforms are available at a relatively low cost, more comprehensive solutions that integrate CIS, VAT, and project management features can be expensive. Contractors, in particular, may need to invest in software that can handle both their contractor and subcontractor relationships, which adds to the overall cost.

In addition to software costs, businesses may also face expenses related to staff training, software upgrades, and ensuring their digital systems are compliant with HMRC’s requirements. While the long-term benefits of MTD (such as reduced errors and better financial visibility) can offset these costs, the initial outlay may be a concern for smaller businesses.

4. Managing CIS and MTD Compliance Simultaneously

The combination of CIS and MTD creates a dual compliance burden for construction businesses. Contractors must not only meet their obligations under CIS—such as verifying subcontractors, making deductions, and filing monthly CIS returns—but also ensure that these records are maintained digitally and submitted through MTD-compliant software.

Ensuring Accurate CIS Deductions

One of the biggest challenges for contractors is ensuring that they are making accurate CIS deductions and maintaining digital records of those deductions. With MTD, contractors must be able to track each subcontractor’s verification status, apply the correct deduction rate (20% or 30%), and ensure that payments are accurately recorded and reported to HMRC.

MTD-compliant software can help automate some of these processes, reducing the risk of errors. However, contractors still need to ensure that their records are up to date, especially when managing multiple subcontractors across different projects. Incorrect deductions or missed payments can lead to penalties, so it’s essential that contractors have robust systems in place to stay compliant with both CIS and MTD.

Meeting MTD and CIS Deadlines

Both CIS and MTD come with strict deadlines for filing returns and making payments. Contractors must file monthly CIS returns by the 19th of each month, while MTD requires quarterly updates (for VAT and, soon, for Income Tax). Meeting both sets of deadlines requires careful planning and efficient record-keeping.

For businesses that have relied on manual processes in the past, this can be a significant adjustment. MTD-compliant software can streamline the process by automatically generating reports and reminders for upcoming deadlines, but contractors and subcontractors must ensure they are consistently entering their data into the system in a timely manner.

5. Handling CIS-Specific Challenges Under MTD

Finally, CIS businesses face a number of unique challenges that make MTD compliance more difficult than for businesses in other sectors. These challenges include:

Subcontractor Verification: Contractors must verify subcontractors with HMRC to ensure they apply the correct deduction rate. This adds an extra step to the record-keeping process, which must be incorporated into the MTD-compliant software.
Tax Credits for Subcontractors: Subcontractors who are subject to CIS deductions must claim these deductions as tax credits when they file their self-assessment returns. Under MTD, this process must now be managed digitally, ensuring that all deductions are accurately recorded and reported.

Benefits of MTD for Construction Businesses

Despite the challenges that Making Tax Digital (MTD) presents to businesses operating under the Construction Industry Scheme (CIS), it also brings substantial benefits. While transitioning to digital tax systems may seem daunting at first, MTD offers long-term advantages that can help construction businesses streamline operations, improve financial visibility, and reduce tax-related errors. By leveraging MTD-compliant software, both contractors and subcontractors can ultimately improve cash flow management, enhance record-keeping accuracy, and benefit from real-time access to tax data.

In this section, we’ll explore how MTD benefits construction businesses and why it’s a positive step towards modernising financial management in the construction industry.

1. Improved Accuracy in Tax Reporting

One of the primary objectives of MTD is to reduce the number of errors in tax submissions. For construction businesses operating under CIS, accuracy in tax reporting is critical due to the complexity of managing deductions, subcontractor payments, and multiple project accounts. Traditional methods of record-keeping, such as manual spreadsheets and paper invoices, are prone to human error, which can lead to incorrect CIS deductions, VAT miscalculations, or missed tax payments.

Digital Record-Keeping Reduces Human Error

By mandating the use of digital record-keeping through MTD-compliant software, construction businesses can greatly reduce the risk of errors. Digital platforms automatically track income, expenses, VAT, and CIS deductions, ensuring that all financial data is recorded accurately. With automated processes, businesses are less likely to overlook important details or make calculation errors, especially when managing multiple subcontractors and project-based work.

For contractors, MTD-compliant software can streamline the process of calculating CIS deductions and submitting monthly returns to HMRC, eliminating the need for manual calculations. For subcontractors, accurate digital records ensure that they can track payments received, deductions made, and claim appropriate tax credits when filing their own returns.

Integration with HMRC Systems

MTD-compliant software is designed to integrate seamlessly with HMRC’s systems, allowing businesses to submit their VAT, Income Tax, and CIS returns directly to HMRC. This reduces the likelihood of data entry errors, which are common when manually transferring figures from spreadsheets or paper records into HMRC’s online portal.

The ability to file returns digitally also ensures that businesses meet all MTD deadlines, reducing the risk of late submissions or incorrect filings. As a result, construction businesses can avoid penalties related to non-compliance, late filing, or inaccuracies in their tax submissions.

2. Better Financial Visibility and Real-Time Data Access

MTD promotes the use of real-time reporting, which allows businesses to have a more accurate and up-to-date view of their financial position. This is especially beneficial for construction businesses, where cash flow can be unpredictable, and project-based income can vary significantly month to month. Real-time access to financial data helps businesses monitor their performance more closely and make more informed decisions about spending, project bidding, and investment.

Enhanced Cash Flow Management

One of the key advantages of using MTD-compliant software is improved cash flow management. By having real-time insights into income, expenses, and outstanding CIS deductions, contractors can better manage their cash flow, avoiding the pitfalls of payment delays or unexpected expenses.

For subcontractors, MTD-compliant software provides instant access to payment records, making it easier to track when they’ve been paid, how much was deducted for CIS, and whether they’ve claimed all relevant tax credits. This level of transparency is crucial for managing finances effectively, particularly when subcontractors are juggling multiple projects with different contractors.

Quarterly Income Tax Updates for Subcontractors

When MTD for Income Tax Self Assessment (ITSA) becomes mandatory in 2024 for subcontractors with income over £50,000, it will require businesses to submit quarterly updates to HMRC. While this may initially seem like an administrative burden, it actually offers significant benefits in terms of financial management. Instead of waiting until the end of the tax year to assess their tax liabilities, subcontractors will be able to monitor their tax obligations in real-time.

This real-time reporting ensures that subcontractors aren’t caught off guard by a large tax bill at the end of the year. They can plan and budget more effectively, making smaller tax payments over the course of the year instead of having to deal with a lump sum payment during self-assessment season.

3. Time and Cost Savings

Transitioning to MTD can ultimately lead to significant time and cost savings for construction businesses. While there may be initial costs associated with purchasing MTD-compliant software and training staff, the long-term efficiencies gained through automation and streamlined reporting processes can more than offset these costs.

Automation of Routine Tasks

MTD-compliant software automates many of the time-consuming tasks associated with tax reporting, such as calculating VAT, generating CIS returns, and tracking expenses. This automation reduces the need for manual data entry and calculation, allowing businesses to focus more on their core operations rather than spending hours managing their finances.

For contractors, automated CIS deduction calculations can save substantial time, especially when dealing with multiple subcontractors and monthly returns. Subcontractors can also benefit from automation, as their income and expense tracking are handled by the software, ensuring that they have accurate records ready for quarterly tax submissions.

Reduction in Administrative Costs

By reducing the reliance on manual processes, businesses can cut down on administrative costs. Many construction firms, particularly smaller ones, may not have the resources to hire full-time administrative or accounting staff. MTD-compliant software serves as a cost-effective alternative, helping businesses manage their tax affairs without the need for extensive administrative support.

In addition, reducing errors in tax submissions means that businesses are less likely to face fines or penalties from HMRC, further saving money over the long term.

4. Improved Business Insights and Planning

Digital record-keeping under MTD doesn’t just benefit businesses when it comes to tax reporting—it also provides powerful insights into the overall financial health of the business. MTD-compliant software offers reporting tools that allow businesses to analyse their income, expenses, and cash flow in detail. This level of financial insight can help construction businesses make better decisions when it comes to bidding on new projects, managing budgets, and planning for the future.

Access to Detailed Financial Reports

Most MTD-compliant software platforms come with built-in reporting features that allow businesses to generate detailed financial reports with just a few clicks. These reports can include profit and loss statements, cash flow projections, and detailed breakdowns of project costs. For contractors managing multiple projects, these reports provide valuable insights into which projects are profitable and which may be costing more than expected.

Subcontractors can also benefit from these reporting features by tracking their earnings across different projects, identifying patterns in their income, and making adjustments to their business strategies where necessary.

Better Tax Planning

With real-time data and quarterly tax updates, construction businesses can engage in more proactive tax planning. Instead of waiting until the end of the financial year to assess their tax liabilities, businesses can monitor their tax obligations throughout the year. This allows them to take advantage of tax-saving opportunities, such as claiming allowable expenses, and plan for upcoming tax payments.

For subcontractors, the ability to track CIS deductions and expenses in real-time ensures that they are not missing out on any potential tax credits or deductions. This proactive approach to tax planning can reduce the overall tax burden and improve financial stability.

5. Compliance and Avoidance of Penalties

One of the major benefits of adopting MTD-compliant software is the assurance of staying compliant with HMRC’s requirements. Non-compliance with MTD can result in significant penalties, ranging from fines for late submissions to more severe penalties for repeated failures to meet digital tax obligations.

Timely and Accurate Submissions

MTD-compliant software ensures that businesses submit their VAT returns, CIS returns, and (in the future) income tax updates on time. These platforms typically include built-in reminders and automated submissions, reducing the risk of missing a deadline or submitting incorrect data.

For contractors, this is particularly beneficial when managing monthly CIS returns, which must be submitted by the 19th of each month. MTD software can help ensure that these returns are filed accurately and on time, avoiding penalties for late or incorrect submissions.

Avoidance of Common Tax Errors

MTD’s digital record-keeping and automated calculations greatly reduce the risk of common tax errors, such as incorrect CIS deductions or VAT miscalculations. By ensuring that all transactions are recorded digitally and calculations are automated, businesses can avoid costly mistakes that could result in penalties or HMRC investigations.

MTD for VAT and CIS – Practical Steps for Compliance

Making Tax Digital (MTD) represents a significant shift in how construction businesses, particularly those operating under the Construction Industry Scheme (CIS), must manage their tax affairs. Achieving compliance requires careful planning, the selection of appropriate software, and a clear understanding of how to transition from traditional accounting methods to digital processes. This section outlines the practical steps that CIS businesses need to follow to ensure they are fully compliant with MTD, covering everything from software selection to integrating CIS deductions with digital tax submissions.

1. Understanding Your Obligations Under MTD

The first step towards MTD compliance is understanding what MTD requires from your business, specifically in relation to VAT and CIS obligations. Here’s a brief overview:

MTD for VAT: If your construction business is VAT-registered, you are required to keep digital records and submit VAT returns using MTD-compliant software. This applies to all VAT-registered businesses, regardless of turnover.
MTD for Income Tax Self Assessment (ITSA): Starting in April 2024, self-employed subcontractors with an annual income over £50,000 will be required to use MTD-compliant software to submit quarterly income tax updates. This threshold will be reduced to £30,000 in 2026.
MTD for Corporation Tax: Although not yet mandatory, it’s anticipated that MTD will extend to Corporation Tax after 2026, affecting limited companies within the construction industry.

For contractors under CIS, you must also ensure that your digital records include accurate tracking of payments to subcontractors, CIS deductions, and monthly CIS return submissions. Subcontractors must track all payments received, including CIS deductions, to ensure they can claim appropriate tax credits when filing their returns.

2. Selecting the Right MTD-Compliant Software

One of the most critical steps in achieving MTD compliance is selecting the right software. Your choice of software should be based on the specific needs of your business, including the size of your operation, the number of subcontractors you work with, and the complexity of your CIS obligations.

Key Features to Look For

When selecting MTD-compliant software, ensure it offers the following features:

VAT Compliance: The software should allow you to submit VAT returns digitally to HMRC, including support for any adjustments or exceptions relevant to the construction industry.
CIS Management: Look for software that integrates CIS management, allowing you to calculate and track CIS deductions automatically, verify subcontractor details, and submit monthly CIS returns.
Income and Expense Tracking: The software should provide robust tools for tracking income and expenses, ideally with the ability to categorise these by project or contract, which is particularly useful for construction businesses.
Reporting and Analytics: Choose software that offers detailed financial reports, including profit and loss statements, cash flow analysis, and tax forecasts. This will help you manage your finances more effectively and make informed business decisions.
User-Friendly Interface: The software should be easy to use, especially for those who may not have extensive experience with digital accounting tools. Many platforms offer training resources or customer support to help you get started.

Popular MTD-Compliant Software for Construction Businesses

Several software solutions are popular among construction businesses for MTD compliance, each offering different features tailored to the industry:

QuickBooks: Known for its user-friendly interface, QuickBooks offers comprehensive MTD compliance, including VAT submissions, CIS deduction tracking, and robust reporting tools.
Xero: Xero is another popular choice, offering MTD-compliant features such as digital VAT submissions, CIS management, and integration with third-party construction project management tools.
Sage: Sage provides MTD-compliant software with strong CIS functionality, making it suitable for contractors who need to manage multiple subcontractors and projects.
EasyBuild: Specifically designed for the construction industry, EasyBuild integrates MTD compliance with project management, offering tailored solutions for contractors managing complex projects.

3. Transitioning from Manual to Digital Record-Keeping

For many construction businesses, the move from manual record-keeping to digital processes represents a significant change. Here’s how to make this transition smoothly:

Assessing Your Current Record-Keeping System

Start by evaluating your current accounting system. If you’re still using paper records or spreadsheets, identify the key areas that will need to be digitised. This includes:

Invoices and Receipts: All income and expenses need to be recorded digitally, so you’ll need to start scanning paper documents or using digital invoicing systems.
CIS Deductions: Ensure that you have a system for recording all CIS deductions made from subcontractor payments, including digital verification of subcontractors.
Bank Statements: Link your bank accounts with your MTD-compliant software to automatically import transactions, which simplifies the process of tracking income and expenses.

Migrating Data to Digital Platforms

Once you’ve assessed your current system, the next step is to migrate your data to an MTD-compliant platform. Most software providers offer tools to help with this process, including:

Data Import Tools: Use these tools to import existing data from spreadsheets or other accounting software into your new MTD-compliant platform.
Batch Scanning: If you have a lot of paper records, consider using a batch scanning service to digitise your documents quickly.
Historical Data: It’s also important to consider how much historical data you need to import. While MTD requires digital records going forward, having a few years of historical data in your new system can be helpful for financial analysis and reporting.

4. Integrating CIS with MTD

Integrating your CIS obligations with MTD can streamline your tax reporting and ensure that you remain compliant with both sets of requirements.

Automating CIS Deductions

One of the most significant benefits of using MTD-compliant software is the ability to automate CIS deductions. Instead of manually calculating the tax to be deducted from each subcontractor’s payment, your software can do this for you, applying the correct rate (20% for verified subcontractors or 30% for unverified ones).

Automatic Verification: Use your software to verify subcontractors with HMRC before making any payments. This ensures that you’re applying the correct CIS deduction rate.
Digital Record-Keeping: The software will keep a digital record of all payments made and deductions taken, which is crucial for submitting accurate monthly CIS returns.

Filing Monthly CIS Returns

Under MTD, your monthly CIS returns must be submitted digitally through your MTD-compliant software. Here’s how to ensure you’re ready:

Set Up Reminders: Most MTD software allows you to set up reminders for upcoming filing deadlines. Ensure that your monthly CIS returns are submitted by the 19th of each month to avoid penalties.
Reconciliation: Use your software to reconcile the amounts you’ve paid to HMRC for CIS deductions with your monthly return. This ensures that your records are accurate and up-to-date.
Year-End Reporting: At the end of the tax year, your software can generate reports summarising all CIS deductions and payments, simplifying the process of filing your annual returns.

5. Training and Support for Your Team

Transitioning to MTD-compliant software often requires some level of training, especially for businesses that are new to digital accounting. Ensuring that your team is comfortable using the new software is crucial for maintaining compliance.

Training Resources

Many software providers offer training resources to help businesses get up to speed with their platforms. These may include:

Online Tutorials: Step-by-step guides and video tutorials that walk you through the basics of using the software, from setting up your account to filing your first VAT return.
Webinars: Live or recorded webinars that cover more advanced features, such as integrating CIS deductions or generating financial reports.
Customer Support: Access to customer support teams who can answer questions or troubleshoot issues as you transition to the new system.

Internal Training Sessions

Consider holding internal training sessions for your team to ensure everyone is on the same page. This is especially important if multiple people will be involved in managing your digital records, such as accountants, bookkeepers, or project managers.

Hands-On Training: Give your team hands-on experience with the software by working through real examples of income tracking, expense categorisation, and CIS return filing.
Process Documentation: Create documentation that outlines your new digital processes, including how to handle specific tasks such as entering new invoices, verifying subcontractors, or submitting returns.

6. Monitoring and Reviewing Your Compliance

After implementing MTD-compliant software, it’s important to continuously monitor and review your compliance to ensure everything runs smoothly.

Regular Audits

Conduct regular audits of your digital records to ensure that all transactions are being recorded correctly and that your CIS deductions are accurate. This will help you identify any issues early on, allowing you to correct them before they become bigger problems.

Monthly Checks: Review your monthly CIS returns to ensure that all payments and deductions are accurately reflected in your digital records.
Quarterly Reviews: Conduct a more thorough review each quarter, ensuring that your VAT submissions and, eventually, your income tax updates are accurate.

Feedback and Continuous Improvement

Encourage your team to provide feedback on the new system, including any challenges they face or improvements that could be made. This will help you refine your processes over time, making MTD compliance easier and more efficient.

Software Updates: Stay informed about any updates or new features released by your software provider. These updates often include improvements that can make your digital record-keeping even more efficient.
Adaptation: Be prepared to adapt your processes as you gain more experience with MTD. As your team becomes more comfortable with the system, you may find ways to further streamline your tax reporting.

7. Leveraging Professional Support

Finally, don’t hesitate to seek professional support if you need it. Accounting firms like LT Accounting can provide valuable assistance in ensuring that your business remains compliant with MTD, particularly when dealing with the complexities of CIS.

Services Offered by LT Accounting

Software Selection and Setup: LT Accounting can help you choose the right MTD-compliant software for your business and assist with the setup and data migration process.
Training and Support: Professional training for your team to ensure they are confident in using the new software and managing digital records.
Ongoing Compliance Monitoring: Regular reviews of your digital records and tax submissions to ensure continued compliance with MTD and CIS requirements.
Tax Planning and Advice: Strategic tax planning services that help you take full advantage of MTD’s benefits, from real-time financial insights to proactive tax management.

Final Thoughts on MTD and CIS

Making Tax Digital (MTD) represents a significant shift in how businesses across the UK, including those operating under the Construction Industry Scheme (CIS), manage their tax affairs. While the transition to digital record-keeping and real-time tax submissions can seem daunting, especially for construction businesses accustomed to traditional methods, MTD offers an opportunity to modernise and improve financial management practices. By understanding the requirements of MTD and integrating them with CIS obligations, construction businesses can not only ensure compliance but also benefit from enhanced accuracy, efficiency, and financial visibility.

Key Takeaways

1. Early Preparation is Essential

The phased rollout of MTD provides construction businesses with a clear timeline for when they need to be compliant. By acting early, businesses can avoid the last-minute rush and potential penalties associated with non-compliance. Whether it’s for VAT, Income Tax Self Assessment (ITSA), or the anticipated Corporation Tax requirements, early preparation is crucial.

Start by assessing your current record-keeping processes and identify what needs to be digitised. Invest in MTD-compliant software that meets the specific needs of your business, particularly when it comes to managing CIS deductions and monthly returns. By transitioning early, you’ll give yourself and your team ample time to adapt to the new system.

2. Choosing the Right Tools

Selecting the right MTD-compliant software is a critical step towards successful compliance. Look for solutions that are tailored to the construction industry, with features that support both MTD requirements and CIS management. The right software will automate routine tasks, reduce the risk of errors, and provide valuable financial insights that can help you make more informed business decisions.

Consider your business’s size, the complexity of your CIS obligations, and the number of projects you manage simultaneously. Software platforms like QuickBooks, Xero, Sage, and EasyBuild offer different features that cater to various needs within the construction sector. Ensure that the software you choose is user-friendly, supports digital record-keeping for both VAT and CIS, and integrates seamlessly with HMRC’s systems.

3. Training and Support Are Key

Transitioning to MTD is not just about adopting new software—it’s also about ensuring that everyone in your business understands how to use it effectively. Provide comprehensive training for your team, utilising the resources offered by your software provider, such as online tutorials, webinars, and customer support.

If your business doesn’t have dedicated accounting staff, consider seeking external support from professionals like LT Accounting. They can provide tailored training, ongoing compliance monitoring, and strategic advice to help you navigate the complexities of MTD and CIS. Professional support can also be invaluable when dealing with more challenging aspects of compliance, such as reconciling CIS deductions or preparing for quarterly income tax updates.

4. Embrace the Benefits of MTD

While MTD requires an upfront investment of time and resources, the long-term benefits are substantial. By automating tax processes and maintaining accurate digital records, construction businesses can reduce the risk of errors, avoid penalties, and gain a clearer view of their financial health. This improved financial visibility allows for better cash flow management, more informed decision-making, and proactive tax planning.

For subcontractors, the shift to quarterly income tax updates under MTD for ITSA offers an opportunity to manage tax liabilities more effectively throughout the year, reducing the likelihood of a large, unexpected tax bill at year-end. Contractors can benefit from automated CIS deduction calculations, making the process of managing multiple subcontractors and projects more efficient.

5. Continuous Improvement and Adaptation

Compliance with MTD isn’t a one-time task—it requires ongoing attention and adaptation. As HMRC continues to expand the scope of MTD, including the future introduction of MTD for Corporation Tax, construction businesses must remain vigilant and ready to adapt their processes as needed.

Regularly review your digital records, monitor your compliance with MTD and CIS deadlines, and stay informed about updates to the software you use. Encourage feedback from your team to identify areas where your processes could be improved, and be prepared to make adjustments as you gain more experience with digital tax reporting.

Moving Forward with Confidence

Making Tax Digital marks a significant step towards modernising the UK’s tax system, and for construction businesses under CIS, it offers a pathway to greater efficiency and accuracy in tax reporting. While the transition may present challenges, with the right tools, training, and support, construction businesses can navigate these changes successfully and unlock the benefits of a digital tax system.

At LT Accounting, we understand the unique challenges faced by construction businesses and are here to help you every step of the way. Whether you need assistance with software selection, training, or ongoing compliance support, our team of professionals is ready to ensure that your business not only meets MTD requirements but also thrives in this new digital landscape.

By embracing MTD and integrating it with your CIS obligations, you can reduce administrative burdens, improve financial management, and focus on what you do best—building the future of the UK’s infrastructure.

How Making Tax Digital Impacts the Construction Industry Scheme (CIS)