Making Tax Digital – Do you know what you need to do?

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Making Tax Digital (MTD) came into effect from April 2019 for all VAT registered businesses trading over the VAT registration threshold of £85,000.

It was introduced in an effort to ‘close the tax gap’. The tax gap being the £8.5 billion annual tax deficit that the government believes exists between tax that should be paid and tax that is actually collected on time.

HMRC believes that by requiring businesses to keep digital records and submit information more regularly this deficit will be reduced.

What do you need to know?

There are significant changes in, or coming in, regarding MTD which you need to be aware of.

Changes to Making Tax Digital

Making Tax Digital for VAT

From 1 April 2022, MTD for VAT applies to all VAT registered businesses regardless of the level of turnover. The first VAT period to which MTD applies to all VAT registered businesses (who are not already doing so) will be the one commencing on or after 1 April 2022.

To sign up to Making Tax Digital VAT you need to:

  1. Visit UK and choose Making Tax Digital-compatible software.
  2. Keep digital records starting from 1 April 2022 or the beginning of your VAT period.
  3. Sign up and submit your VAT Return through Making Tax Digital.

Businesses can find help and support on how to sign up for Making Tax Digital on GOV.UK.

For businesses who need help and support HMRC has a series of webinars. More information can be found on HMRC’s Making Tax Digital help page.

Please ensure that you sign up to Making Tax Digital at least 5 days after your last non-Making Tax Digital VAT return deadline date, and no less than 7 days before your first Making Tax Digital VAT Return deadline date or you may pay for your VAT twice.

Advantages of Making Tax Digital for VAT

  1. Digital Record Keeping – less clutter and mess in the office.
  2. Avoidance of Mistakes – you are less likely to lose receipts and therefore under claim.
  3. Increased Security – accounting software is more secure than spreadsheets or manual records
  4. Cloud-Based Technology – you have flexibility where you work.
  5. More Real-Time Information – up to date information means better decision making.
  6. Automation – frees up your time for the aspects of the business you prefer.

Which software to use for Making Tax Digital?

We use Xero and believe it is one of the best software packages on the market.  It comes down to personal choice and I’ve found Xero the most efficient. To decide what’s right for you, consider:

  • The essential features you need
  • How much you can afford to pay
  • Researching the different accounting software packages and prioritise the best ones for you.
  • Are there any hidden costs?
  • Schedule a demo
  • Take a trial

The biggest motivator needs to be that you choose a software that you are going to be happy using otherwise you won’t keep it up to date.

For more details on Making Tax Digital compliant account software, visit HMRC for all ready and compatible software as well as software in development.

Making Tax Digital for Income Tax Self-Assessment (MTD for ITSA)

Making Tax Digital for Income Tax Self-Assessment is set to come into effect from 6 April 2024.

If you have income from a sole trade, a partnership or from property, or a combination of these, then this will impact you if your turnover is greater than £10,000 per annum.

Actions you will need to take for Making Tax Digital for Income Tax Self-Assessment

  1. Keep digital records of all business income and expenditure.
  2. Sign up for a new MTD for ITSA account with HMRC before 6 April 2024
  3. Update HMRC at least every three months with a summary of income and expenditure using compatible software.
  4. At the end of your accounting period, finalise any profit and loss position via an end of period statement (or EOPS as it will be known). This is where you will be able to make any adjustments for allowances and reliefs.
  5. The final declaration effectively brings together everything done above into one final declaration which must be submitted by 31 January in the following year. It is this final declaration which will confirm to HMRC your tax liability. You will no longer need to submit an annual self assessment return.

Sign up early for Making Tax Digital?

To help HMRC test and develop the service and to get used to quarterly reporting, you can sign up to use Making Tax Digital voluntarily now if you’re:

  • a UK resident;
  • registered for self-assessment with no outstanding tax returns or tax payments; and
  • a sole trader with income from one business, or a landlord who rents out UK property.

You cannot sign up yet if you need to report:

  • income from any other sources; or
  • an income tax charge, e.g. the High Income Child Benefit Charge or annual allowance pension tax charges.

If you do join, you must still submit the tax return for the previous tax year. For further information, see the guidance here.

Making Tax Digital is going to happen so start planning now so you have everything in place. See it as a good opportunity for you to make your business more efficient. 

If I can be of any assistance, as I understand it can all be a bit overwhelming, then please get in touch.