Staying on top of your tax responsibilities might not be fun, but it’s an essential part of running a successful business. With the extension of Making Tax Digital (MTD) on the horizon, HMRC is making one of the biggest changes to the tax system in years.
In this article, we’ll explain what MTD is and how it will affect you.
What is Making Tax Digital?
Making Tax Digital is the government’s scheme to fully digitise the UK tax system. The programme stalled a little due to the COVID-19 pandemic, but it’s back on track to continue rolling out over the next few years.
In general, Making Tax Digital makes two major changes to how businesses do their taxes:
- Reports must be submitted more regularly
- All data must be kept and submitted in digital form
MTD is due to extend to the whole tax system and will cover income tax self-assessment from April 2024. For now, though, the most pressing matter is MTD for VAT, which extends from April 2022.
How Will Making Tax Digital Affect Me?
MTD will completely change how you submit your VAT returns – and, in a couple of years’ time, your income tax self-assessment returns. Under the current system, you submit your returns manually at the end of your accounting period. HMRC then tells you how much you owe and you pay them.
Under MTD, by contrast, the process is quite different. You must:
- Record all your data in digital form, using HMRC-approved ‘functional compatible software’
- Link your software to HMRC’s so your relevant data can be submitted automatically
- Submit your data to HMRC every quarter
This is a significant change and there’s a fair bit of jargon around it, which can make it seem more complicated than it is. In practice, the only thing you need to do is find HMRC-approved, MTD-compliant accounting software. Once you’ve got that in place, making the switch to MTD can be as easy as toggling the relevant setting on.
In fact, if you choose the right software, MTD can provide significant benefits to your business. There’s far less paperwork, for one thing, and a much lower chance of human error. On top of this, good accounting software will allow you to view how much you owe in real time, ensuring that you don’t get caught out when it comes time to pay.
Businesses already need to adopt digital solutions for things like sales and marketing. MTD just means extending your use of digital to your bookkeeping, VAT and, eventually, income tax self-assessment processes.
When does Making Tax Digital expand?
MTD for VAT rolled out for all businesses with turnover of £85,000 or more in April 2019. In April 2022, it’s set to extend to all businesses who are registered for VAT, regardless of turnover. From this date, all businesses registered for VAT must comply with the new rules or risk a penalty.
Being aware of this deadline is especially important as under MTD, you can’t wait till the end of the tax year to sort out your taxes. Instead, you have to submit quarterly returns throughout the year. This means that you’ll need your software in place and ready to go before the start of your first accounting period after 1 April 2022.
To avoid any stress, we recommend getting things together now!
Can I get an exemption?
In short, probably not. HMRC does make some allowances for exemptions, but the rules are pretty strict and the aim of the scheme is to make the UK tax system almost entirely digital.
Exemptions can be granted if you cannot use computers due to:
- Religious objections
- Age or disability
- Location or remoteness
If you think you might be eligible for an exemption, you can apply online.
The shift to MTD is a major change, and for VAT-registered businesses, it’s happening soon. Unless you meet the very narrow criteria for an exemption, you will be affected by it and you need to get on top of it quickly. Thankfully, all you need to do to stay compliant with the new rules is find and use the right software and use it to submit regular returns – and doing this can actually make your accounting and tax processes simpler.
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