What is Making Tax Digital and How Does it Affect Me?
HMRC's Making Tax Digital plans are about making tax returns and record keeping electronically and moving away from paper records. MTD for business involves keeping digital records and using accounting software to complete tax returns with a clearer audit trail of the data included in each return. Eventually, paper records won't meet the requirements of tax legislation.
HMRC are phasing MTD in gradually. Firstly MTD was introduced for VAT from 01 April 2019, for VAT-registered businesses with a taxable turnover above the VAT threshold of £85,000.
Eventually HMRC will introduce Making Tax Digital for Individuals (Income Tax) and Corporation Tax, whilst extending MTD to all VAT-registered businesses regardless of turnover. Self-Employed people and landlords can currently sign up for the Income Tax pilot, instead of filing Self Assessment returns.
The 2019 Spring Statement confirmed that this would be delayed until at least 2021, to allow for Brexit delivery and with the Covid-19 outbreak, there may be further setbacks.
Here's the current Making Tax Digital timetable:
April 2019: VAT-registered businesses with a taxable turnover above the VAT threshold of £85,000 need to keep digital records and submit digital VAT returns using compatible software.
October 2019: businesses who initially deferred now need to comply with MTD.
April 2022: HMRC will extend MTD to all VAT-registered businesses.
April 2023: HMRC will implement MTD for Income Tax for Self-Employed and Landlords with income over £10,000.
MTD for VAT
VAT-registered businesses with taxable turnover above the VAT registration threshold (£85,000 currently) now need to keep digital records and send digital VAT returns using MTD compliant software.
If your business has a taxable turnover below the VAT threshold, you can still sign up to MTD voluntarily. HMRC encourages this, claiming the software will help you "better understand how your business is performing" and we would tend to agree. Whilst switching to digital bookkeeping software can be daunting at first, when it is used properly and kept regularly up to date, it can be invaluable to the smooth running of your business.
HMRC say examples of digital records you need to keep include:
business name and contact details
VAT number and details of any schemes used
VAT on supplies made and received
adjustments to returns
time of supply (tax point)
rate of VAT charged on supplies made
reverse charge transactions (if your software doesn't record them, you need to record them twice as a supply made and a supply received)
daily gross takings (DGT) if you use a retail scheme
purchases of assets you can reclaim tax on if you use the Flat Rate Scheme
documents covering multiple supplies made or received on behalf of your business
You should use compatible software to prepare and submit your returns (see examples of compatible software below). This will pull information from your digital records, where the same timescales apply - you must keep current year records and 6 previous years.
MTD for individuals (Income Tax)
It's not compulsory but Self-Employed people and Landlords can sign up for a MTD pilot scheme.
The pilot lets you keep records digitally and send Income Tax updates to HMRC through the year instead of filing a Self Assessment tax return. This allows a more real-time system and lets you see how much Tax you owe as you go along.
You'll need to use compatible software to keep records and send a quarterly income and expenses summary to HMRC. At the end of the tax year, you'll send a final report with any last adjustments and your tax for the year will be calculated. This is the point at which you'll claim any allowances and reliefs.
MTD for Corporation Tax
There is not much information on when MTD will be introduced for Corporation Tax. Watch this space!
MTD Compliant Software
Businesses must use compatible software to keep records, bookkeeping and send digital tax returns.
The product you use to submit digital tax returns needs to be compatible with HMRC. HMRC has a list of compatible software – examples include Sage, Xero, Quickbooks, FreeAgent and our partners Capium. At Equal Accountancy, we have extensive knowledge of all popular software providers and would be happy to support your business using whichever you prefer. We are delighted to offer our clients free bookkeeping software with our partners Capium.
For businesses that don’t already use accounting software, it can be scary change and can be daunting to get started. It is likely you will incur a one-off set up fee and ongoing costs (if not using our partners) but we cannot stress enough how valuable accurate record keeping and regular updates through the year can be to your business and tax planning.
We offer a variety of packages to suit your business needs. You are able to completely outsource your accounts function to us and we can look after the entire process for you or you can use our expertise to review your bookkeeping quarterly and oversee the submission for you. Give us a call today to discuss how we can best support you.
Equal Accountancy Ltd offers Accountancy and Bookkeeping services in Hemel Hempstead and surrounding areas across Herts, Beds and Bucks. We offer a range of services for Limited Companies, Self-Employed individuals and Landlords including Year End Accounts, Corporation Tax returns, Self-Assessment Tax returns, Payroll services, VAT returns, Bookkeeping and Company Secretarial. Get in touch today for a free, non-obligatory quote for your business needs.