Making Tax Digital (also referred to as MTD), is not a new concept and may be something that you have heard of already. The new digital initiative was introduced by HMRC on the 1st of April 2019 and is set to have a number of different phases, each relating to different taxes. This initiative was introduced as part of a phased approach for the self-employed and small business owners to embrace digital recording, ultimately becoming completely paperless.
Within this blog, we will outline what Making Tax Digital is, the key deadlines you need to be aware of and the different phases of implementation.
So, what is Making Tax Digital?
Making Tax Digital is a “bold vision for a digital tax system” set by HMRC, which will apply to a wide range of taxpayers, most businesses, self-employed individuals, landlords and individual taxpayers. MTD encourages these individuals to complete digital tax records and returns, using compatible software. HMRC introduced this to make it “easier for individuals and businesses to report their income accurately and keep on top of their affairs.”
As previously mentioned, this initiative has a number of different phases, with the first being introduced in 2019 “Making Tax Digital for VAT”. This related to keeping digital records and using accounting software to complete VAT tax returns. This is only applicable to VAT-registered businesses with a taxable turnover above the VAT threshold of £85,000.
What are the key deadlines for Making Tax Digital?
Here is a summary of the Making Tax Digital deadlines:
- 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.
- More complex businesses who were deferred were required to comply with Making Tax Digital (in relation to the above phase).
- Making Tax Digital will be compulsory for businesses with a turnover below £85,000 VAT threshold.
- Taxpayers who file Income Tax Self Assessments for business or property income of more than £10,000 a year will need to comply with Making Tax Digital.
NOTE: Due to the coronavirus, HMRC previously announced that the deadline for digital links between accounting software and HMRC systems were extended. The deadline is now your business’s first VAT period following 1st April 2021.
Although some of these deadlines may seem far away and in some cases it might not be compulsory for you to do this, you can still sign up for a digital tax returns pilot scheme here. It would be a good time to update your processes now for a seamless transaction in the future and consider using accountants who are specialised in this area and understand digital changes.
It is also worthwhile preparing yourself for these changes as these deadlines imply that you need to be ready by that point and it is not a simple next day switch.
How to prepare for MTD
Does this apply to me?
Firstly, it is important for you to understand whether you are impacted by MTD and if so, what are the deadlines that apply to you. There are a few organisations which are exempt from MTD.
If you are already using accounting software to manage your affairs, you should ensure that the software you are using is HMRC compatible. Your digital records don’t all need to be in one place (although that will definitely help). Xero and Quickbooks are compatible software, however HMRC have provided a full list of compatible software here.
Training & Processes
If you are not familiar with using accounting software, you will need to allow for some time to get used to this so we would recommend implementing this prior to your deadline. This will help you get used to this new approach and ensure everything is in order in time for your deadline.
It is also important to ensure you are set up for quarterly reporting as this will be time you need to schedule in, if it isn’t already.
Working with an accountant that specialises in Xero and Quickbooks will make this transition easier as they will be able to provide you with guidance on an effective process. In addition to this, you may want to consider outsourcing your bookkeeping for a completely smooth and trouble free experience.
It may seem daunting at first, especially if you are not using accounting software presently, however there are a number of benefits you can look forward to:
- Less paperwork
- We’ve all either been there or seen it, the dread of sorting through receipts, invoices and documents. Using accounting software will help minimise this, ensuring you can keep an eye on your expenses, incomings and outgoings with ease. Your data will be reviewed quarterly as well which will mean you will be more likely to be up to date by the end of the year.
- Fewer mistakes
- The MTD process is more robust and will help avoid costly mistakes and will allow you to submit information to HMRC in seconds!
- Real-time tax information
- You will have clear visibility throughout the year as opposed to having to wait until your tax return is submitted. This will help you prepare for anything you may owe prior to the tax return deadline. You will be able to make more informed decisions for your business.
Are you ready for Making Tax Digital?
If you’re looking for support, our accountancy and tax specialists are available to support you through this transition. Feel free to contact us: [email protected] / 01932 485 325