What is Making Tax Digital? (MTD)
And how will it affect my business?
Making Tax Digital (MTD) is a government initiative to modernise HMRC’s tax system, with the aim of making the whole process of administrating tax simpler and more efficient. All of your tax information will be in one place (your digital account), and you will be able to pay tax based on your business activity during the year, uploading and updating your tax account in real time.
If you own a business or are self-employed and you pay income tax, national insurance, VAT or corporation tax, then it is quite likely you will be affected. This means you could be required to keep track of your tax affairs digitally using MTD compatible software, and to update HMRC at least quarterly via your digital tax account.
Eventually, this will replace annual tax returns. It will be a legal requirement, and there will be penalties for non- compliance. Everyone will be allocated a digital account through the current Government Gateway. You’ll need to log into this and update your information every quarter, using digital accounting software. This means that you will need to move from your existing desktop or manual record keeping and onto a cloud accounting package. The Business Bookkeeper can advise you on the software you will need and how to comply with the new quarterly reporting requirements.
When Will HMRC Make Tax Digital For Businesses?
MTD starts with businesses above the VAT threshold limit for accounting periods from April 2019. Those affected will be required to keep digital records for VAT purposes. It’s likely that all other businesses will have to comply by 2020. The good news is that The Business Bookkeeper are certified in the installation and operation of two of the leading MTD compliant, cloud accounting software systems (Xero and QuickBooks), which are specifically designed for small businesses.
One of the main advantages of making tax digital for businesses is that it will lessen the chaos surrounding annual tax returns. Here’s a brief summary of making tax digital benefits:
Tax information will need to be submitted every three months, which means that there will no longer be a worry of cramming twelve months of work at the end of the financial year.
Far less paperwork
Your cloud accounting software will make an automatic record of financial transactions coming into and out of your business. This will be checked against information submitted to HMRC each quarter.
Because tax will be calculated quarterly, there’s far less chance of a big bill building up. You’ll find out what your tax liability is every few months so nothing gets out of hand.
More chances of lowering your bill through tax planning
Businesses that keep regular tabs on the tax they owe can make strategic decisions to lower their bill. You might make more retirement contributions or reinvest in the business, for example.
There’s not much wrong with gaining greater visibility of your tax situation. For some businesses, however, there will be changes to manage. Here’s a summary of the issues you may have with making tax digital:
Compulsory use of technology
By making tax digital for businesses, the HMRC requires you to submit returns online, through an online accounting software.
More reporting deadlines
While VAT returns were already submitted quarterly, income tax and corporation tax weren’t. After Making tax digital takes effect, the single annual filing for income tax and corporation tax will be supplemented by four quarterly reports.
Loss of privacy
You may not be comfortable that some of your electronic transactions will be visible to HMRC. But you’ll be able to review the data and fix mistakes before it’s submitted.