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 – meaning the end of the tax return for millions.” Not sure what it means for you? Here’s what you need to know:
What is Making Tax Digital?
Making Tax Digital is all about making tax administration more effective, more efficient and easier for taxpayers, through the implementation of a fully digital tax system.
The roll-out of the initiative has already begun. 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.
Further announcements about the initiative 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.
A Making Tax Digital pilot scheme began in April 2017, and a phased roll-out of the initiative is currently in progress with all VAT returns having to be submitted digitally through MTD compliant software.
Income tax will come under the scope of MTD for most businesses in April 2024 requiring quarterly digital submissions throughout the year, the first being due by the end of July 2024 covering the April to June 2024 quarter.
By the time the roll-out begins 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 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.
More information is available at gov.uk/personal-tax-account
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.
How will the initiative be implemented?
As Making Tax Digital is rolled out, a number of changes will be implemented. VAT registered businesses are already required to keep digital records and submit quarterly returns digitally for VAT purposes only.
In April 2024 Making Tax Digital will apply to all sole traders and landlords with gross sales/rents of over £10,000 per year.
The end of the tax return
One of the biggest implications for small business owners is the eradication of the annual self assessment tax return in it’s current form. HMRC have not yet announced full details but our current understanding is that there’ll be quarterly digital submissions of the business income and expenses throughout the year, followed by an annual return to confirm the figures, to adjust for year end adjustments and to incorporate other declarations which aren’t business related, such as interest, dividends, pensions, etc.
HMRC claim that 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.
• Save hassle – by managing all your business tax affairs online.
• Plan and budget more effectively – with a real-time calculation of how much tax you owe.
Businesses that come under the scope of Making Tax Digital 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 software in some way and “bridging software” is already starting to become available.
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 commercial 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. Your accountant will be happy to talk through the options with you and explain how they plan to work with you as Making Tax Digital is rolled out.