A Guide to Making Tax Digital (MTD Guide)
Since the government announced its plans for Making Tax Digital in 2019, HMRC has begun to make changes in the way millions of businesses record and pay their taxes.
Making Tax Digital for VAT is already in operation and businesses have been required to be registered since April 2022.
In addition, making tax digital for income tax will affect the self-employed and property owners with more than £10,000 income from April 2024 onwards with partnerships to follow April 2025 and corporation tax to follow in the next few years.
So what does this all mean for your business?
Keep reading for a comprehensive look at MTD, specific deadlines for registering, and how to comply with the regulations (including the best software for making tax digital).
‘HMRC’s ambition is to become one of the world’s most digitally advanced tax administrations in the world.’
What is Making Tax Digital?
Making Tax Digital, also referred to as MTD, is a change in the way individuals and businesses are expected to report and pay tax. It is designed to make it easier for you to keep on top of your affairs and for HMRC to receive information more regularly.
HMRC’s plan is to be one of the most digitally advanced countries when it comes to tax administration. MTD is a fundamental change in the way the tax system works to make it more effective, more efficient, and easier to get your tax right.
The changes are not being all rolled out at once but in the long run, will apply to VAT-registered businesses and self-employed and landlord income tax, followed by partnerships and companies in future years.
MTD for VAT-registered businesses is already in effect and you are expected to be registered for the service unless you have a valid exemption.
Self-employed and landlords with income over £10,000 can already register for MTD but there is no obligation to register until April 2024. (Partnerships April 2025)
As for corporation tax, this will be rolled out in future years. To start with, companies can join a pilot scheme but it is not going to become mandated until at least 2026.
The advantages of MTD
MTD is designed to transform tax administration in the UK. It is ‘a key 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’. The move to digitisation has been welcomed by many businesses, with 61% in strong agreement that it is the right thing to do, although over a quarter of organisations disagree.
The advantages of MTD are that it provides an efficient way of storing, submitting and accessing information. There are however challenges around practical issues such as software requirements, the skills needed for the software, and the complexities of new reporting periods and working digitally with international suppliers and partners.
Making Tax Digital Deadlines
Below are the current deadlines to register for MTD if it is applicable to your business. The dates relate to when you need to register. The dates you usually submit tax returns or pay tax bills will not change.
Making Tax Digital for VAT Deadline: 1 April 2022
Making Tax Digital for Income Tax Deadline: 6 April 2024
Making Tax Digital for Partnerships Deadline: 6 April 2025
What Do the Changes Mean?
To comply with MTD, businesses must keep digital financial records. This must be done in what HMRC refers to as ‘compatible software’. Put simply, you will be required to connect the software directly to HMRC in order to file your tax returns.
The connection is known as a ‘digital link’. HMRC defines a digital link as having two key characteristics:
Data is electronically transferred between software programs or applications. This link can include a linked spreadsheet cell with automated formulas.
Automated transfer that does not require any manual actions like copying and pasting data or other ways of manually moving data between multiple pieces of software.
In effect, HMRC wants all your data to be input into a single piece of software and automatically sent to them with a single click of a button.
How Do You Register for Making Tax Digital
You or your accountant can register for MTD (VAT and Income Tax) directly on the HMRC website.
If you don’t already have a Government Gateway account for your business you will need to create one.
Along with this registration, you will need to find software that’s compatible with making tax digital. Keep reading for our top picks!
Making Tax Digital for VAT
MTD affects your VAT accounting process and the way in which business stores and submits information. Within these digital accounts you’ll need to record:
Your business name and address
VAT registration number
VAT accounting schemes
The amount of VAT on goods and services you supply
The amount of VAT on goods and services you receive
Adjustments that you make to your returns
Source of VAT Transactions (UK, Europe and Rest of World)
Time of supply and value of supply (value excluding VAT) for everything you buy/sell
Rate of VAT charged on goods and services you supply
Reverse charge transactions
Total daily gross takings (if you use a retail scheme)
Items you can reclaim VAT on (if you use the Flat Rate scheme)
It’s worth noting that the new rules don’t change your regular VAT return deadlines.
Making Tax Digital for Sole Traders and Self-Employed
MTD for income tax is set to have a huge change in the way millions of people such as sole traders and landlords deal with taxes.
The rules will only apply to people who have applicable income over £10,000 across their properties or business.
The £10,000 threshold applies to gross income or turnover, rather than profit. Adding to this, it applies to total gross income if you have multiple trades or property businesses.
From 6 April 2024, all eligible businesses and landlords are required to keep digital records of all income and expenses via compatible software. This requires you to purchase or use a free version of software to be compliant.
In preparation, HMRC is working with software providers to ensure small businesses have access to affordable products. The government is also committed to the availability of free software for small businesses with simple affairs.
If you are below this threshold, you have the option to continue with the current self-assessment system.
In rare cases, there are exemptions to MTD which include:
It’s not reasonable for you to use digital tools due to age, disability, or lack of internet due to remote locations. This is often referred to as digital exclusion.
Subject to an insolvency procedure
Business is run by practising members of a religion whose beliefs are incompatible with using electronic communication
If you feel you require an exemption you must apply directly to HMRC with your reason.
In addition, Trusts, Estates, Trustees of Registered Pension Schemes, and Non-Resident Companies are exempt from MTD.
Best Software for Making Tax Digital
Xero’s cloud-based accounting software is a favourite with many medium to large sized businesses. It is designed to be used directly from a web browser with the ability to create multiple user accounts and access for your accountant.
The modern dashboard enables you to quickly track accounts, income, purchases, expenses, inventory, payroll and VAT. It’s a complete accounting solution that helps you stay on top of your finances from one central location, along with complying with Making Tax Digital software requirements.
QuickBooks has grown to become one of the leading accounting solutions that offer a range of software products to suit businesses of all sizes. You can keep things simple with ‘QuickBooks’ self-employed which is affordable for sole traders looking to comply with MTD.
Larger businesses can take control of every aspect of their finances, make payroll simple, and get VAT peace of mind. The company is rolling out features to make the transition for you and your accountant to Making Tax Digital straightforward.
A handy addition is the QuickBooks bridging software which allows spreadsheet users to comply with the new regulations
Whilst it is free for Natwest and RBS customers it is otherwise a good and sometimes preferred option for smaller clients due to its simplicity.
Sage Business Cloud Accounting is on-the-go accounting for an all-round solution. It brings your finances into the modern age and seamlessly enables you to comply with MTD regulations.
Much like Xero and QuickBooks, it gives you a single piece of software to keep on top of your business finances. It’s easy accounting software for small businesses that need to get MTD compliant. You can track your taxes with a tap, run invoicing, pay your staff, calculate and submit VAT. All from a web browser or phone app.
Free Software for Making Tax Digital
The government has committed to working with the industry to ensure there is low-cost and free software for small businesses with straightforward affairs.
Here is a list of free and low-cost options for MTD compliance:
Federation of Small Businesses MTD
Making Tax Digital, HR and Health and Safety Webinar
Hosted by Perrys, AMR and SMEAdvisor.
The webinar covered MTD for Income Tax, Software, Health and Safety and HR after Covid.
All slides shown can be downloaded here:
Visit AMR’s website here:
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