Making Tax Digital: what does it mean for you?

Making Tax Digital is a government initiative that sets out a bold vision for a digital tax system to “make it easier for individuals and businesses to get tax right and keep on top of their affairs”. Not sure what it means for you? Here’s what you need to know.

What is Making Tax Digital?

Making Tax Digital (MTD) is all about making tax administration more effective, more efficient and easier for taxpayers, through the implementation of a fully digital tax system.

The rollout of the initiative is already well underway and MTD for VAT is now in effect. This means that all VAT-registered businesses in the UK with VATable sales above the VAT threshold will have to file VAT returns using MTD-compatible software and store financial records relating to VAT digitally.

Further announcements about MTD for Income Tax and Corporation Tax are expected in the coming months and software providers like FreeAgent are actively engaging with HMRC to help with the implementation of MTD and simplify the shift for small businesses.

The rollout of the initiative is already well underway and MTD for VAT is now in effect. This means that all VAT-registered businesses in the UK with turnover above the VAT threshold will have to file VAT returns using MTD-compatible software and store financial records relating to VAT digitally.

If your business is VAT-registered, you should already have an MTD-compatible software solution in place. Although HMRC has said that “other taxes” won’t come under the scope of MTD until at least 2021, every small business owner and individual taxpayer now has access to a digital account that they can use to check their records and manage their details with HMRC. As the rollout of MTD gains momentum, you should see the following major changes to the way you manage and report your business taxes:

  • Through your digital account you will be presented with a complete picture of your business’s tax affairs and you will be able to manage all of your tax liabilities at the same time, in the same place.
  • HMRC will collect and process information affecting tax in as close to real time as possible. This should prevent any tax due or repayments owed from building up.
  • You will no longer have to wait until the end of the tax year to know how much tax you have to pay.

Who does Making Tax Digital apply to?

The changes outlined in the Making Tax Digital initiative will apply to a wide range of taxpayers, including most businesses, self-employed people and landlords, as well as individual taxpayers. However, HMRC has confirmed that it will legislate for an exemption “for taxpayers who cannot engage digitally” and that the legislation will be based upon the existing VAT online filing exemptions.

HMRC has also confirmed that businesses with annual sales under £10,000 won’t be mandated to take part in MTD but can opt in if they wish to do so.

How will the initiative be implemented?

As Making Tax Digital is rolled out, a number of changes will be implemented. Based on the information released by HMRC in July 2017, here’s a rough timeline of the developments that are most relevant to business owners:

July - Dec 2017

  • Digital tax accounts show taxpayers an overview of their tax liabilities in one place.
  • HMRC begins private pilot of MTD for VAT.

Spring 2018

  • Live pilot of MTD for VAT begins.

April 2019

  • MTD for VAT is mandated for businesses with VATable sales above the VAT threshold. These businesses are now required to keep digital records and submit quarterly tax returns for VAT purposes only.

2021 onwards

  • HMRC looks to widen the scope of Making Tax Digital.

A new way of reporting to HMRC

The move to a more digital tax system should come as welcome news to the many taxpayers who already choose to report much of their information to HMRC online.

Percentage of returns currently submitted online

percentage tax returns submitted online

The shift to digital should also help to iron out some of the issues that can make the current method of reporting information to HMRC frustrating for business owners. Specifically, Making Tax Digital promises to “modernise the tax system” and “make it more effective, more efficient and easier for customers to comply”.

The end of the tax return

One of the biggest implications for small business owners is the eradication of the annual tax return. Under MTD businesses, self-employed people and landlords will instead be able to keep track of their tax affairs digitally and update HMRC at least quarterly via third-party software, or more often if they’d prefer. HMRC has said that this won’t involve completing a full tax return four times a year; it will simply mean providing more regular updates online.

The introduction of a ‘real-time’ tax system means that instead of reporting information on tax returns and paying liabilities long after the end of the tax year, you will be able to see a real-time view of your business tax affairs and liabilities through your digital accounts. This should make it easier to understand how much tax you owe and then budget accordingly.

The benefits of Making Tax Digital

  • Know where you stand with a full picture of your business’s tax affairs in your digital account.
  • Save time by having access to all your business’s tax info in a single place.
  • Plan and budget more effectively with a real-time calculation of how much tax you owe.

What next?

Businesses that come under the scope of Making Tax Digital - including MTD for VAT - will be required to use digital tools, such as software or apps, to keep records of their income and expenditure. HMRC has said that spreadsheets can be used, as long as they meet MTD’s technical requirements. In order to do that, however, HMRC has said that it is likely that spreadsheets will need to be combined with so-called bridging software, which allows data to be sent from a spreadsheet into HMRC’s systems.

If Making Tax Digital applies to you, you will be required to use digital tools to keep records of your income and expenditure.

HMRC has stated that it won’t provide its own software, but will ensure that basic apps and software products are available for businesses with “the most straightforward affairs”.

Many other businesses and their accountants, however, will choose to use more comprehensive MTD-compatible software, like FreeAgent. These tools use the data from your day-to-day business activity to build an accurate picture of your business’s tax data, highlighting any possible errors and offering prompts for information that might otherwise be overlooked. Once your software has compiled the relevant data, you or your accountant will then submit it directly to HMRC, either via a computer or a smartphone.

Want more help?

Check out our other Making Tax Digital resources for small business owners and freelancers.

Get your free guide to Making Tax Digital →

Find out how Making Tax Digital will impact your business in your free MTD whitepaper including:

  • An overview of how Making Tax Digital will affect you
  • A timeline of key dates
  • How your businesss can take advantage of the shift to digital tax
  • What's happening next
Download the guide

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