Making Tax Digital
Posted on 17th May 2022
What is Making Tax Digital and how will it help businesses?
Making Tax Digital is a new policy from HMRC designed to make it easier for businesses, self-employed individuals, and landlords to handle their taxes correctly, submit returns properly, and keep their tax affairs in order.
According to HMRC, in the tax year 2018-19, avoidable mistakes cost the Exchequer £8.5 billion. The hope is that by using digital records for tax submissions along with the help that many software programs offer, combined with a reduction in transposition problems as information is submitted to HMRC directly, the amount of tax lost to simple errors will be drastically reduced.
When does Making Tax Digital come into effect?
Making Tax Digital is not a completely brand-new tax initiative and is being introduced in phases to make the transition for businesses and individuals easier. The first phase was introduced in April 2019, and HMRC also introduced a Digital Personal Tax Account all the way back in 2015, so the move to digitalisation of tax management is nothing new.
This first phase was aimed at businesses that had a taxable turnover of more than the £85,000 VAT threshold, as they would likely have the resources and capabilities to make the transition easier. The second phase was also introduced last month, with all VAT-registered businesses now required to comply with Making Tax Digital.
All self-employed businesses filing Self-Assessment tax forms, and landlords with business or income from property above £10,000 will be required to make the transition to Making Tax Digital from April 6th, 2024. Initially, this deadline was scheduled for 2023, but was amended to 2024 by HMRC to give businesses extra time to get ready following the disruption caused by the pandemic.
So, what’s the lesson, here?
There are never any short cuts to success, but the story of the Chinese Bamboo Tree teaches us that patience, hard work, and the determination to go after your goals, certainly improves your chances!
For years, this tree grows underground, taking root, developing a system and stable base strong enough to support its potential for outward growth when it finally blooms. If the tree does not develop this strong foundation, it will not be able to sustain its life as it grows.
Similarly, if we dig up this seed each year to check its progress, it will stunt the Chinese Bamboo Tree’s growth.
Just like the Chinese Bamboo Tree needs a strong foundation, the same is true of your business.
How do I comply with Making Tax Digital?
If you are a VAT registered business, whether you have a taxable turnover under or over the VAT threshold of £85,000, you should already be complying with Making Tax Digital for VAT.
You’ll now need to keep digital records for your business including:
- Your business name and address
- The VAT registration number for your business
- The VAT on services and goods supplied – i.e., what you sell, hire, lease, or transfer
- The VAT on services and goods you receive – i.e., what you purchase, rent, hire, or lease
- Adjustments made to a return
- Value and time of supply for all sales and purchases
- Rate of VAT charged
- All reverse charge transactions
There are some other records you’ll need to keep, but these will depend on certain types of schemes used and trading methods.
You’ll also need to ensure that you are using a compatible software program that can integrate with HMRC systems. This could be as simple as using spreadsheets, but they will need to be linked if there is more than one.
All your digital records will still need to be submitted according to current HMRC deadlines once you sign up to Making Tax Digital.
If you are a self-employed business, or a landlord with business or property income at or below £10,000, you don’t have to do anything just yet, as the deadline to transition to the rules for Making Tax Digital for Income Tax doesn’t arrive until April 2024, but you can join HMRC’s live pilot for the Making Tax Digital service for Income Tax. This will allow you to voluntarily keep digital business records and update HMRC, instead of using the Self-Assessment tax return filing system. This will give you a chance to get used to how Making Tax Digital works and put systems in place to be able to cope once the 2024 deadline arrives, as well as having the opportunity to help develop the service through the pilot scheme. According to the government, around a third of businesses and landlords have already voluntarily signed up to Making Tax Digital for Income Tax.
What are the benefits to Making Tax Digital?
Aside from the obvious avoidance of penalties for not using the Making Tax Digital service by the deadline appropriate to you and your business, the Making Tax Digital service should provide you with a real-time overview of tax owed as you update your records.
This can only be of benefit to a business, letting you work out what you’ll need to pay and potentially even make for more accurate cashflow forecasting.
Making Tax Digital should also help to reduce the number of errors that can be made during the submission process, helping you to avoid nasty surprises after submitting.
It will also ensure that you are using digital software to keep records, which is often more reliable and accurate than paper-based filing systems and forms.
What about Corporation Tax? Will that require the use of Making Tax Digital services?
Currently, there are no immediate plans to introduce a Making Tax Digital service for Corporation Tax. The government is welcoming companies and organisations to share their views and will provide businesses with the chance to partake in a Making Tax Digital for Corporation Tax pilot scheme in the future, but there are no plans for introducing the service before 2026.
If you are a VAT-registered business, you should already be using the Making Tax Digital for VAT service. If you are a self-employed business or landlord, it would be worth seriously considering joining the Making Tax Digital for Income Tax service to get to grips with how it works and be ready for its official introduction in 2024.
If you need any assistance with the transition and how it affects your business and accounting records, please do not hesitate to get in touch.
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