At present, businesses above the VAT threshold of £85,000 are covered by the system, which requires them to keep digital records and provide VAT returns through software.

Since it was introduced in 2019 more than 1.4 million businesses have joined the programme, submitting more than 6 million returns.

From April 2022, the programme will be extended to all VAT-registered businesses with turnover below the VAT threshold (£85,000). From April 2023, it will apply to taxpayers who file income tax self-assessment tax returns for business or property income of more than £10,000 a year.

Jesse Norman, financial secretary to the Treasury, said: “Making Tax Digital will make it easier for businesses to keep on top of their tax affairs. But it also has huge potential to improve the productivity of our economy, and its resilience in times of crisis.”

Making Tax Digital changes will affect the way that taxes are reported, not the level of tax that is collected.

The government says it will help to minimise avoidable mistakes – which cost the exchequer £8.5bn in 2018-19.

The long lead-in time will allow businesses, landlords and agents time to plan. It also gives software providers enough notice to bring a range of new products to market, including free software for businesses with simple tax affairs.

Dawn Register, partner in tax dispute resolution at BDO, said: “This will apply to all self-employed and landlord businesses with turnover in excess of £10,000. This is a very low threshold, and will bring in many individuals who might be ‘blissfully ignorant’ of the Making Tax Digital (MTD) programme, including, for example, one property landlords and hobby businesses.

“We expect many small businesses will not currently keep digital records and will need to upgrade their software to become MTD compatible. Under MTD, businesses and landlords will switch to sending quarterly summaries to HMRC. This will help cash flow planning for tax payments and should make tax compliance less burdensome in the longer term.

“The move to digital records should be welcomed providing sufficient time and support is given by HMRC, particularly for those with enhanced needs. Given the inevitable increase in remote working in the future, this is also sensible and possibly a switch already made by many businesses since the start of the Covid-19 lockdown.”