The future of digital tax is coming, and it’s going to affect almost every small business and sole trader in the UK. HMRC’s Making Tax Digital initiative is a huge change that will see all taxes filed and paid online. If you’re not ready for it, you need to start planning now – because the first key deadline arrived on 1 November 2022 and other deadlines are looming.
Here’s what you need to know – from what you need to do and when, to the MTD-compatible software that can make your tax compliance so much easier.
What is Making Tax Digital?
Making Tax Digital (MTD) is a government initiative that will change the way businesses file and pay their taxes. Under the new system, businesses will have to use software to keep track of their revenue and expenses and submit their tax returns online.
This might sound like a big change, but it’s actually something that many businesses are already doing. In fact, around 1.6 million of the 5.5 million small businesses in the UK have been voluntarily filing their VAT returns through MTD ahead of the government deadline.
The government says that the new system will make it easier for businesses to comply with their tax obligations. They also hope that it will help to reduce the amount of tax evasion and fraud.
Eventually, the ability to use paper records as a basis for your tax return will be phased out. Only digital records will meet the requirements of tax legislation.
Will Making Tax Digital affect me?
MTD is being phased in gradually, with different taxes being affected at different times. At the moment MTD only affects VAT-registered businesses. But soon, all businesses will have to comply.
Some of the key dates have already passed and larger businesses have been filing digital VAT returns for some time. However, there are still two critical deadlines that smaller businesses and sole traders need to be aware of:
1 November 2022
By 1 November 2022, all VAT-registered businesses needed to have signed up for MTD and, going forward, must keep digital records and send digital VAT returns. This includes businesses with a turnover below the VAT registration threshold of £85,000 who have voluntarily registered for VAT.
From now on, you won’t be able to use your existing VAT online account to file monthly or quarterly VAT returns. There’s a small transition period for annual returns where you can use your current VAT online account until 15 May 2023.
If you are voluntarily registered for VAT with a turnover under £85,000, you may be wondering why you were able to use your existing VAT online account to file your 7 November 2022 return. Take note – this is the last time you will be able to use this account. From now on, you’ll need to use MTD-compatible software to file monthly or quarterly VAT returns that are due after 1 December 2022.
1 April 2024
From 1 April 2024, self-assessment taxpayers and landlords who turnover a minimum of £10000, need to use MTD-compatible software to keep track of their business or property income and expenses and file their self-assessment tax returns.
After this date, you’ll need to send an income and expenses summary to HMRC every three months plus a final report at the end of the year. That’s when your tax for the year will be calculated, and you’ll claim any allowances and reliefs.
What do you need to do now?
If you’re affected by Making Tax Digital – and most businesses and sole traders will be – the first thing you need to do is sign up for an HMRC Online Services account. This will give you access to the MTD service and allow you to file your tax returns online.
The second priority is to start using MTD-compatible software to keep track of your finances and submit your tax returns. We generally recommend QuickBooks, Sage and Xero as the best options for small businesses, landlords and the self-employed. They are easy to use and integrate with HMRC Online Services, so you can file your tax returns with just a few clicks.
Rather than waiting, it’s best to make the changes to your tax processes now. This will give you time to get used to the software before the 2024 deadline. The changes mean that some businesses will need to become more disciplined with their bookkeeping and not wait to record everything at year-end.
Developing those good habits now will stop any last-minute panic, plus you’ll save a lot of time that you can spend on other areas of your business.
Is this all news to you? Don’t worry. We can take care of everything on your behalf. Just give us a call or drop us an email. We’re happy to help!