What does “Making Tax Digital” entail?
Making Tax Digital (MTD) is a government initiative to move paper-based tax reporting online, effectively eliminating the need for millions of UK firms to fill out forms. Changes to VAT, income tax, and corporation tax are being phased in overtime, bringing a growing number of small businesses under the MTD umbrella.
Businesses with a turnover of more than £85,000 are already required by MTD requirements to complete quarterly VAT filings digitally, with records held online and transmitted via software.
Those with a revenue of less than £85,000 will be required to comply by April 2022.
Income tax is next in line for digitization: from April 6, 2023, individuals with a self-employed or property income of over £10,000 must file electronically, while corporate tax will move online after a pilot period sometime around 2026, according to the latest proposals.
What businesses must do to comply with MTD regulations:
- Maintain digital records.
- Once a quarter, submit a summary report to HMRC.
- By January 31 of each year, file an end-of-period statement and a final declaration to make any necessary adjustments.
Why is the tax system going digital?
How much do self-assessment tax returns appeal to you? I’m guessing not much. MTD aims to make the tax system more transparent and efficient for the UK’s 5.5 million small businesses and HM Revenue & Customs.
You won’t have to spend each January hunting through your business transactions, receipts, and invoices for your Government Gateway code because it will be saved once the fundamental information has been stored digitally.
Under the new rules, a self-employed person must now update their records once per quarter, rather than once a year. This means you’ll have less time to misplace your receipts, which can’t be a bad thing, but it also means you’ll be able to see a clearer picture of your tax situation.
Small business owners should follow these five steps.
1. Find out if your company qualifies for Making Tax Digital
HMRC’s Making Tax Digital (MTD) experiment has been live for more than two and a half years. Since April 2019, UK firms with a VAT turnover of more than £85,000 have been required to digitally file their returns.
They are making Tax Digital will apply to businesses that charge VAT and have a taxable turnover of less than £85,000 starting in April 2022. Approximately 1.1 million small enterprises will be affected by this phase of MTD for VAT.
2. Be aware of your VAT deadlines.
Businesses must conduct a study into the legislation and assist in bringing their leadership teams up to speed. There’s a lot of useful material, but knowing where to start can be challenging. HMRC has built its MTD for VAT page, which gives important information for businesses to determine whether they are eligible, how to sign up, and more.
Businesses should keep track of the dates on which VAT returns are due in a diary.
3. Speak with your accountant or bookkeeper.
They are the most knowledgeable about your company and will be able to advise you on the best course of action. They may also be able to provide recommendations, such as which software is ideal for you.
4. Determine which software package is most appropriate for you.
So, how do you decide which accounting software to use?
It is highly dependent on the type of company you manage. Each company must make a decision based on its unique circumstances. There are already several various cloud software solutions available for SMEs that are capable of documenting transactions online.
Also see: 9 Accounting Software Platforms for Tax Digitization
5. Sign up for HMRC updates.
HMRC sends out updates on MTD’s development regularly, which may influence you and your business. Make sure you stay up to date on these announcements, so you don’t miss anything crucial.
What if I don’t want to use accounting software that requires a license?
Microsoft Excel spreadsheets combined with bridging software, such as QuickBooks Online, can provide a straightforward, cost-effective, and compliant alternative to submit VAT returns online to HMRC for individuals who aren’t ready to leap dedicated accounting software. Businesses can use Microsoft Excel to create a “9-Box” VAT return, which they can then upload to the bridging software, which connects to HMRC and submits the VAT online.
MHA indirect tax associate Alison Horner adds, “This gives a simple and cost-effective method to solve the digital switch issues for clients.”
Is it possible for me to be exempt from Making Tax Digital?
Exemption from MTD is possible, but only if a company can demonstrate that using computers, software, or the internet to comply with MTD standards is neither reasonable nor viable. Most businesses, however, would not be eligible for an exemption and will have to pay the price between now and April 1, according to MHA.