When it comes to Making Tax Digital (MTD) the self-employed and small businesses are still a little in the dark! So let us take you through our need to know guide…
What exactly is Making Tax Digital?
HMRC want to go paperless, so it makes sense to convert to keeping digital records and using software to complete tax returns, it’s also a good step towards being more eco-friendly! According to HMRC it is an important part of the government’s plans to “make it easier for individuals and businesses to get their tax right and keep on top of their affairs.”A personal tax account had already been brought into play in 2015, which HMRC had hoped would help make it easier for people to manage their tax affairs – so this is the next stage. Making Tax Digital is being phased in gradually, MTD for VAT will start from 1 April 2019, affecting VAT-registered businesses with a taxable turnover above the VAT threshold of £85,000. Eventually, HMRC will introduce Making Tax Digital for Income Tax and Corporation Tax. What’s more, it’s expected they’ll extend Making Tax Digital to all VAT-registered businesses, but there’s little detail on this at the moment. The earliest these changes will be phased in from is April 2020.
What is the Timeline Making Tax Digital (MTD):
- 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 (some ‘more complex’ businesses* get a six-month deferral)
- October 2019 – more complex businesses who were deferred need to comply with Making Tax Digital
- April 2020 (at the earliest) – HMRC will implement Making Tax Digital for Income Tax and Corporation Tax (self-employed people and landlords can currently sign up for the Income Tax pilot, instead of filing Self Assessment returns).
What digital records will need to be kept by business and self-employed individuals?
You can use spreadsheets to calculate or summarise VAT transactions and work out what information you need to send to HMRC. But ultimately you’ll need to use compatible software to send that information. You might also need what HMRC calls ‘bridging software’, which converts your records to the right format before you submit. You’ll need to use compatible software to keep records and send an income and expenses summary to HMRC every three months. You’ll be able to see estimates of how much tax you’ll owe. At the end of the accounting year, you’ll send a final report and your tax for the year will be calculated. This is the point at which you’ll claim any allowances and reliefs.
What software is required for Making Tax Digital?
Businesses will need to use compatible software to send digital tax returns. Your digital records don’t all have to be in one place, but HMRC wants data to flow and be exchanged digitally between applications by 31 March 2020. Until then you can use copy and paste to transfer information. We have a guide to the best accounting software for small business. The product you use to submit digital tax returns needs to be compatible with HMRC. HMRC has a list of compatible software – examples include Xero, Quickbooks, and Zoho.
Businesses that don’t already use accounting software are likely to face one-off and ongoing costs. There are also likely to be costs when training staff to use the software and comply with Making Tax Digital. Making Tax Digital for individuals is not compulsory (yet) but self-employed people and landlords can sign up for a digital tax returns pilot scheme. The pilot lets you keep records digitally and send Income Tax updates to HMRC instead of filing a Self Assessment tax return. Both sole traders with income from one business and landlords who rent out UK property (excluding furnished holiday lettings) can also sign up.
So do you feel that you’re now ready for Making Tax Digital? If not please do get in touch with us here at DNA Accountants we are always happy to talk business.