Making Tax Digital: 8 common myths busted
Confused about Making Tax Digital (MTD)? Don’t worry, we’re here to shed some light on the initiative and separate fact from fiction.
Myth 1. Making Tax Digital rules don’t apply to anyone yet
The first major phase of the initiative, MTD for VAT, came into effect on 1st April 2019. Under MTD for VAT, businesses with VATable sales above the VAT threshold have to keep digital records and submit quarterly VAT returns using MTD-compatible software.
From April 2022, VAT-registered businesses with a taxable turnover below the VAT threshold will also have to follow the MTD rules.
The scope of MTD will then extend to Income Tax under Making Tax Digital for Income Tax Self Assessment (ITSA). From 6th April 2023, self-employed business owners and landlords with annual incomes above £10,000 will have to store records digitally and submit returns using MTD-compatible software.
MTD for Corporation Tax is expected to be the next phase in the initiative. HMRC has advised that MTD for Corporation Tax rules won’t come into effect until at least 2026.
Myth 2. Making Tax Digital is hugely unpopular
A change as big as MTD is bound to bring out strong opinions on all sides, but evidence points to many people feeling positive about the initiative.
The government’s recent evaluation of MTD shows that 1.4 million businesses had already signed up for MTD by March 2020. This figure includes 270,000 VAT-registered businesses with VATable sales below the VAT threshold that signed up for MTD voluntarily.
In FreeAgent’s 2017 survey of small business owners who had already digitised their bookkeeping, nearly half of the respondents said they felt positively about MTD, compared with just 11% who felt negatively.
Myth 3. A digital tax system will be too technical for most people
Millions of businesses already manage tax online via a digital tax account and 93.9% of Self Assessment tax returns were filed online in 2020.
However, if you have not yet signed up for MTD, HMRC has promised advice and support that will make navigating the change as simple as possible.
Myth 4. My spreadsheet is just as good as any digital tax software
Spreadsheets are great for some tasks, but MTD-compatible accounting software can offer so much more. For example, as well as providing features such as tailored business insights, time-saving automation and a real-time view of your finances, FreeAgent gives you access to a friendly support team who are on hand to help with your queries.
Statistics show that the majority of spreadsheets contain errors, and these aren’t always easy to spot or rectify. Using accounting software can help you improve the accuracy of your bookkeeping, and can make it easier to track changes to your accounts.
Myth 5. HMRC will provide me with free software
HMRC does not provide software for MTD. MTD-compatible software is available from dedicated third-party providers such as FreeAgent.
If you have a business current account with NatWest, Royal Bank of Scotland or Ulster Bank NI, you get full access to FreeAgent free of charge for as long as you retain your account. FreeAgent is also free with a Mettle account if you make at least one transaction per month with Mettle.
Myth 6. Making Tax Digital means I’ll need to keep extra records
HMRC has confirmed that businesses will not need to keep any more records than they do already or provide more information to HMRC.
In its 2020 evaluation of MTD for VAT, HMRC noted that some businesses had already reported benefits including saving time, a reduction in input errors and productivity gains.
Myth 7. Digital record-keeping is going to be a huge hassle
It might take a bit of time to get used to new software, but when you do you’ll reap the rewards. In FreeAgent’s 2020 survey of small business owners, customers reported that switching to FreeAgent’s accounting software saved them seven and a half hours a month on average, compared to their previous bookkeeping method.
Being able to see your tax liabilities build up over time in FreeAgent helps to give you a clear picture of your business finances, while the software automates time-consuming daily admin such as sending late-payment reminders. FreeAgent also enables sole traders and limited company directors to complete their Self Assessment tax return and then file it directly to HMRC from the software.
Myth 8. Switching to digital accounting is going to be incredibly stressful
HMRC’s research has shown that for many businesses, the transition to MTD for VAT has been easier than expected. One business owner quoted in HMRC's 2020 report said: “Initially [it’s] a little overwhelming but [after] the first month or two, you suddenly realise that the process is so simple.”
At FreeAgent we know that a lot of our customers avoid stress by managing their business accounts using our MTD for VAT-compatible software:
How did I freelance for 10 yrs without @freeagent? Book-keeping a breeze, auto invoice chasing and my support email answered in 32 minutes- Tom Albrighton (@tomcopy) January 12, 2017
I must say that using @freeagent has saved me so much time and hassle, and made accounting almost a pleasure!- Claire Brotherton (@abrightclearweb) February 4, 2020