The age of the traditional tax return is coming to an end. If you haven’t heard about Making Tax Digital, you soon will.
But what exactly is this major HMRC tax administration shake-up?
How will Making Tax Digital affect your business, and what do you need to do about it?
What new challenges does it bring?
You can find the answers here, plus everything else you need to know about Making Tax Digital.
What is Making Tax Digital?
Making Tax Digital (MTD) is part of the HM Revenue and Customs drive to digitise taxation. It’s designed to combat tax evasion and reducing errors resulting in tax underpayment or overpayment.
MTD aims to do this by streamlining and simplifying the way tax information is reported in order to ensure greater accuracy in declared taxable income.
Under the new rules, businesses must keep digital tax records and submit quarterly updates electronically, instead of completing an annual tax return. To do this, they have to use third-party compatible accounting software.
HMRC says Making Tax Digital is the first phase of a wider initiative to modernise tax administration and a natural progression of how many businesses already handle tax matters.
The Making Tax Digital timeline
Making Tax Digital was announced in April 2019 for VAT-registered businesses with a taxable turnover of more than £85,000.
From April 2022, all businesses registered for VAT have had to begin conforming with Making Tax Digital, and from November 1 must use compatible software to keep VAT records and file returns.
This is what HMRC plans for the future:
- April 2024 – Making Tax Digital comes into operation for income tax paid by self-employed business owners and property landlords.
- April 2025 – partnerships with individual partners have to use MTD for income tax.
- 2026 onwards – introduction of Making Tax Digital for corporation tax.
Is Making Tax Digital compulsory for small businesses?
Making Tax Digital compliance is mandatory for VAT and income tax self-assessment (ITSA), with certain exceptions.
Exemptions include:
- Businesses with gross income of less than £10,000 a year.
- Businesses going through an insolvency procedure.
- Businesses run entirely by a religious group whose beliefs go against use of electronic communications.
- Businesses that are already exempt from filing VAT returns online.
- Businesses where it would be impractical to use digital technology.
How do I sign up for Making Tax Digital?
Before registering for Making Tax Digital, you must have MTD-complaint software.
To sign up, you’ll need to use the online Government Gateway system.
The Making Tax Digital VAT sign-up process looks like this.
You can register for MTD for VAT here.
Benefits of Making Tax Digital
The government claims Making Tax Digital will make businesses more efficient.
It says a digitised tax system will simplify businesses’ tax obligations by doing away with outdated methods such as paper records and cumbersome spreadsheets, which can easily lead to mistakes and financial penalties.
Accounting software or cloud technology would also enable businesses to spot and rectify any errors as soon as they happen. This would make it easier to claim expenses back in real time, instead of having to dig through a box of receipts at the end of the year.
It’s also claimed that in the long term, as businesses get used to Making Tax Digital, technology will do most of the heavy lifting, reducing the need for professional help.
HM Revenue and Customs insists MTD will not only improve compliance with tax regulations but also increase productivity of businesses while saving HMRC money.
Some observers say Making Tax Digital means the UK will have a more reliable tax stream to finance crucial public services such as hospitals, schools and infrastructure.
Potential drawbacks of Making Tax Digital
Common concerns among businesses about Making Tax Digital centre on initial costs.
Having to buy cloud accounting platforms or other software compatible with MTD could put an additional financial strain on millions of businesses that don’t currently have this technology in place – averaging out at an estimated £280 per business.
Another worry is that Making Tax Digital quarterly reporting will initially result in businesses having to rely more on professional help from accountants, with associated extra expense. And businesses will still have to submit a year-end declaration as well.
Other reservations about MTD concern creating extra work. For example, while recognising the benefits of Making Tax Digital, the Association of Independent Professionals and the Self-Employed (IPSE), fears freelancers will face a heavy additional admin burden with the change to quarterly reporting.
A further concern is that with about 20 percent of the UK’s self-employed being digitally excluded, owners of some small businesses may be unable to access computer technology or lack the skills to use it.
What does the future hold under Making Tax Digital?
The government is trumpeting MTD as a taxation revolution with many benefits. Critics point to extra initial costs for businesses and the ongoing extra work involved.
Like it or not, Making Tax Digital is here, and the way you deal with tax is going to change if it hasn’t already.
On the positive side, it’s claimed that MTD presents an opportunity for businesses to embrace new accounting technology such as AI (artificial intelligence) software to improve tax reporting and control, and business efficiency, productivity and revenue.
On the negative side, taxation experts suggest compliance with Making Tax Digital will cost a lot more than HMRC estimates.
There’s also speculation that MTD could eventually lead to collection of taxes earlier and more often – four payments a year coinciding with the three-monthly reporting regulations. It’s feared this could hit businesses’ cash flow.
If this does materialise, the extra financial pressure could exacerbate already common issues facing small businesses, including:
- Struggling to pay suppliers and staff.
- Difficulties during slow periods due to seasonal demand.
- Inability to continue investing in business growth.
- Penalties for late payment of taxes.
The solution to problems like these may be greater reliance on business finance in the future, such as business loans to pay tax and VAT and for investment in other areas of the business like, new equipment.
