Five things you need to know about Making Tax Digital for Business
The biggest change to the UK’s tax system for a generation is happening right now – but do you know how your business will be impacted? Our recent survey of small business owners in the UK suggests that one in five still don’t know what Making Tax Digital (MTD) is, let alone how they’ll be affected. If this includes you, here’s a quick rundown of the things you need to know.
1. No more annual tax returns
Making Tax Digital is being introduced to make the reporting of your business’s financial information to HMRC more efficient, with no more ‘bureaucratic form filling’. This includes the end of the annual tax return as we know it for everyone impacted by MTD – instead you will send information to HMRC digitally at least four times a year via your digital tax account. This doesn’t mean that you’ll have to complete four tax returns per year, you’ll simply need to provide more regular financial updates online.
2. Making Tax Digital has already started
Following a successful pilot scheme, Making Tax Digital for VAT rolled out to all affected businesses from 1st April 2019. The rules require VAT-registered businesses with VATAble sales above the VAT threshold to store financial data and submit VAT returns to HMRC through MTD-compatible software, like FreeAgent. Check out this guide to discover the best Making Tax Digital software for your business.
The scope of Making Tax Digital for VAT will expand in 2022. VAT-registered businesses with a taxable turnover below £85,000 will need to follow Making Tax Digital rules for their first VAT return starting on or after April 2022.
Making Tax Digital for Income Tax will be introduced in 2023. It will require self-employed businesses and landlords with annual business or property income above £10,000 to follow the rules for MTD for Income Tax from their next accounting period starting on or after 6th April 2023.
The details for Corporation Tax are still being finalised.
Here’s a timescale highlighting the biggest changes for small businesses since MTD began:
- MTD private pilot begins for those who have voluntarily subscribed.
July – December 2017
- Digital tax accounts show taxpayers an overview of their tax liabilities in one place.
- HMRC begins a private pilot of Making Tax Digital for VAT.
- Live pilot of Making Tax Digital for VAT begins.
- MTD for VAT is mandated for businesses with a turnover above the VAT threshold. These businesses are now required to keep digital records and submit quarterly returns for VAT purposes only through compatible software.
- HMRC no longer accepts VAT submissions made using the XML facility. This means that MTD VAT returns must be submitted via HMRC’s MTD connection.
- VAT-registered businesses with VATable sales below £85,000 will need to follow Making Tax Digital rules for their first VAT return starting on or after April 2022.
- Making Tax Digital for Income Tax Self Assessment will be introduced requiring self-employed businesses and landlords with annual business or property income above £10,000 to follow the rules for MTD for Income Tax Self Assessment from their next accounting period starting on or after 6th April 2023.
- MTD for Corporation Tax is expected to be the next phase in the initiative. However, HMRC has advised that MTD for Corporation Tax rules won’t come into effect until at least 2026.
You may have noticed that you already have access to your digital tax account with HMRC. This account is integral to MTD – it’s where you will update HMRC about your business finances and access all your tax information.
3. You will need to submit your business’s figures using software
You will need to keep HMRC informed of your business’s finances digitally through some form of accounting software. HMRC has stated that spreadsheets might be OK for this but the spreadsheet you use will need to be able to connect to your digital tax account. It's also worth bearing in mind that there are a number of other reasons to ditch spreadsheets when it comes to recording your financial data!
4. Tax updates will happen in 'real time'
HMRC has said that once MTD is up and running they’ll provide you with your business’s tax position in ‘as close to real time as possible’. To help prevent errors and stop tax due or repayments owed from building up, HMRC will collect and process the information you provide throughout the year. This means that you shouldn’t have to wait until the end of the year to find out how much tax you owe.
5. You might incur a penalty if you fail to comply with MTD for VAT
MTD for VAT came into effect on 1st April 2019. HMRC has described the first year following the launch as a “soft landing period”, which they explain is a period of time “for businesses to have in place digital links between all parts of their functional compatible software”. However, there may be some circumstances in which you could incur a penalty for failing to comply with the initiative during this time. Find out more in our MTD for VAT penalties guide.
Update March 2020: in response to the coronavirus crisis, HMRC has extended the soft landing period. All MTD businesses will have more time to out in place digital links between all parts of their functional compatible software. This means that you now have until your first VAT period starting on or after 1 April 2021 to put digital links in place.