At the moment Making Tax Digital is only mandatory for VAT-registered businesses which are over the VAT registration threshold. And even then it is only a requirement for filing VAT returns. But is Making Tax Digital just for VAT?
The short answer is no. MTD for VAT is just one part of HMRC’s mission to go digital. Let’s talk about how this impacts on your business.
What is Making Tax Digital?
Making Tax Digital is about how we move away from clunky paper tax records and filings, to a proper digital experience.
The master plan is to get all businesses, including the self-employed, to file digital tax returns and maintain digital tax records. The personal tax account has been around since 2015, and actually being able to log in to your online tax account and find out what you need without having to call HMRC is a really good thing.
HMRC’s view is the UK tax system has to embrace and embed digital technologies in order to be fit for the future. One thing COVID has shown us is that we can’t just rely on offices full of people churning out data. So much of what we do is now online – from ordering pretty much anything under the sun from Amazon, to accessing a phenomenal amount of information on Google, and meeting people over Zoom.
It’s not just accounting software, it’s also digital links
MTD for VAT was the first phase of MTD and kicked in from April 2019. Its not just about using accounting software to file your VAT returns. You also have to keep digital records. If you keep a digital image of a bill or receipt then you no longer have to keep the paper records. Eventually, keeping paper records will be a thing of the past.
Phase 2, which applies from April 2021, is all about digital links. How do you transfer your data into your accounting software? Have you got automated feeds from your bank, your website, your point of sale software? HMRC want to reduce the chance of errors as much as possible, and manually copying data from one system to another isn’t good enough. One area we find we spend a lot of time on for new clients is understanding and improving the data flows.
MTD for VAT will be extended to include all VAT-registered businesses from April 2022.
There are big changes coming for Income Tax in 2023
The next big milestone we are working towards is Making Tax Digital for Income Tax. Self-employed businesses with annual trading income above £10,000 will need to follow the rules for MTD for Income Tax from April 2023. Landlords with property income above £10,000 will also be affected.
This is a huge change for sole traders, partnerships and landlords. Right now 2023 feels a long way off, but its less than 2 years. We are already working with our existing sole traders and partnerships to get them moved onto Xero during the current tax year where they aren’t already.
If MTD for VAT is anything to go by, MTD for Income Tax will be a major challenge for accountants. You are going to need help so talk to us now even though it seems a long way away.
You will have to report your income quarterly using accounting software
MTD for Income Tax is a new way of reporting your earnings to HMRC. You will have to use software to keep digital records, and submit updates to HMRC every quarter. You can sign up to a voluntary pilot scheme already, although not everyone would be eligible to take part.
Remember Corporation Tax
The government has published a consultation on the future design of Making Tax Digital for Corporation Tax. The earliest that MTD for Corporation Tax will kick in is 2026. Phew!
Making Tax Digital will eventually change tax payment deadlines
Tax payment deadlines won’t change in this parliament. However the Tax Day Announcements earlier in the year make it sound like the payment of both income tax and corporation tax will eventually be brought forward. The intent is for payments to be made closer to the point when the income is generated. We aren’t surprised – hopefully there will be plenty of warning to allow businesses to plan their cashflow accordingly.
What do I do next?
We would encourage anyone who has any questions about moving onto accounting software to contact us and join our waiting list. There are a few steps you will need to work through while you are on the waiting list. You are then ready to get the best possible set up and training.
