Business Finance 101: Making Tax Digital
Making Tax Digital is a key component of the government’s drive to make it easier for individuals and businesses to get their tax right and keep on top of their affairs.
Here’s what you need to know and what you need to do to comply.
What is Making Tax Digital?
HMRC’s Making Tax Digital program involves requiring small businesses and the self-employed to complete digital tax records and returns, with the ultimate goal of going completely paperless.
HMRC has an ambition is to become one of the most digitally advanced tax administrations in the world. And Making Tax Digital is making fundamental changes to the way the tax system works, promising to be more effective, more efficient, and easier for taxpayers to get their tax right.
In 2015, HMRC introduced the Personal Tax Account, a digital tax account that aims to make it easier for individuals to manage their personal tax affairs. Then in 2019, came the launch of the first phase of MTD – Making Tax Digital for VAT. This requires qualifying businesses to keep digital records and using accounting software to complete VAT tax returns.
Making Tax Digital deadlines
HMRC is phasing in Making Tax Digital gradually. Making Tax Digital for VAT started on 1 April 2019, affecting VAT-registered businesses with a taxable turnover above the current VAT threshold of £85,000. If you are below the VAT threshold, you can voluntarily join the Making Tax Digital service now.
VAT-registered businesses with a taxable turnover below £85,000 will be required to follow MTD rules for their first return starting on or after April 2022.
From April 2023, Self Assessment taxpayers will need to comply with MTD for Income Tax.
Here are the Making Tax Digital deadlines:
April 2019
Making Tax Digital for VAT
VAT registered businesses with a taxable turnover above the £85,000 VAT threshold, are required to keep digital records and submit digital VAT returns using compatible software. Some businesses which were deemed to be more complex were given a six-month deferral.
October 2019
Making Tax Digital for VAT
More complex businesses, such as trusts, and some ‘not for profit’ organisations, which were deferred need to comply with MTD.
April 2022
Making Tax Digital for VAT
MTD will be compulsory for VAT-registered businesses with a taxable turnover below £85,000.
April 2023
Making Tax Digital for Income Tax
MTD will apply to self-employed businesses and landlords with annual business or property income above £10,000.
Making Tax Digital for VAT
VAT-registered businesses with a taxable turnover above the VAT registration threshold (currently, £85,000) must now keep digital records and use software to submit digital VAT returns.
If your current business turnover is below the VAT threshold, you can now voluntarily join the Making Tax Digital service. However, all VAT-registered businesses will be required to follow Making Tax Digital rules for their first return on or after April 2022.
Digital records you must keep
HMRC state that you need to keep the following digital records:
your business name, business address, and VAT registration number
any VAT accounting schemes used
the VAT on all goods and services supplied
the VAT on all goods and services received
any adjustments made to a return
the ‘time of supply’ (tax point)
the rate of VAT charged
reverse charge transactions
your total daily gross takings (DGT) if you use a retail scheme
asset purchases if you use the Flat Rate Scheme
Making Tax Digital for Income Tax
Self-employed businesses and landlords with annual business or property income above £10,000 will need to follow the MTD rules for Income Tax from April 2023.
A number of businesses and agents are already keeping digital records as part of a pilot to test and develop the Making Tax Digital service for Income Tax. Self-employed business or landlords can voluntarily use software to keep business records and submit Income Tax updates to HMRC instead of filing a Self Assessment tax return. To find out more, visit the governments Marking Tax Digital for Income Tax website ↗
Making Tax Digital for Corporation Tax
The government has recently published a consultation on the potential design of Making Tax Digital for Corporation Tax ↗ It asks for views from companies and other organisations required to pay Corporation Tax, professional bodies, and software developers.
The government plans allow businesses to take part in a pilot for Making Tax Digital for Corporation Tax and will not mandate its usage before 2026.
Compatible software for Making Tax Digital
Before signing up to Making Tax Digital for VAT, businesses will need to use compatible software to send digital tax returns. You don’t have to keep all of your digital records in one piece of software, but HMRC states that you “must have links between the software you use by your first VAT period after 1 April 2021.” Ways you can link software includes emailing records, linking cells in spreadsheets and downloading and uploading files.
Using software compatible software will allow you to submit VAT Returns directly to HMRC without visiting HMRC’s website. HMRC has a list of compatible software ↗ which has been through HMRC’s recognition process.
HiThrive is proud to be a Xero Partner and its platform is a great option to enable you and your business to become compliant. Get in touch to talk to us about how we can help you prepare for MTD.
