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If you’re self-employed or run a small business, you’re likely to have heard of Making Tax Digital (or MTD). But what exactly is the purpose of this government initiative? Who does it apply to? And what do you need to do in order to be compliant?
This guide takes you through the most important aspects of Making Tax Digital, covering everything from registering for MTD to finding compatible software.
What is Making Tax Digital?
Making Tax Digital is an initiative from HM Revenue and Customs (HMRC). By replacing manual tax administration with an online system, MTD is designed to make it easier and more efficient to report and pay tax.
Ultimately, the aim is to have a tax system that's entirely paperless and allows taxpayers to see how much tax they owe in real-time.
Which taxes are part of MTD?
Making Tax Digital for VAT
At the moment, VAT is the only tax that's been fully rolled out as part of the Making Tax Digital service. Under MTD for VAT, businesses are required to keep digital records and submit tax returns using compatible, government-approved software.
Making Tax Digital for Income Tax
The next tax on the MTD roadmap is Income Tax. From April 2024, it will apply to anyone who earns at least £10,000 a year from property or self-employment.
You can continue sending Self Assessment tax returns until then, or you can join the live pilot to test and develop the Making Tax Digital service for Income Tax.
Making Tax Digital for Corporation Tax
Although the government has published a consultation on the future of Making Tax Digital for Corporation Tax, it won't be compulsory before 2026.
What are the Making Tax Digital for VAT deadlines?
HMRC started to gradually introduce Making Tax Digital for VAT in April 2019. Back then, it was only a requirement for VAT-registered businesses with a taxable turnover of £85,000 and above.
All other VAT-registered businesses have been required to comply with HMRC's rules on Making Tax Digital since April 2022, regardless of their turnover.
From 1 November 2022, businesses will no longer be able to use the old VAT portal to file monthly or quarterly VAT returns (but if you file annually, you can use it until 15 May 2023). It's therefore important to sign up to Making Tax Digital and find compatible software before the November deadline.
How do I sign up to MTD for VAT?
If you haven't already, you can sign up for Making Tax Digital for VAT on HMRC's website.
To sign up, you need:
- Your business email address
- A Government Gateway user ID and password
- Your VAT registration number and latest VAT return.
Depending on your business type, you'll also need to provide:
- Sole trader: your National Insurance number
- Limited companies: your company registration number and Unique Taxpayer Reference
- General partnerships: your Unique Taxpayer Reference and the postcode where you’re registered for Self Assessment
- Limited partnerships: your Unique Taxpayer Reference, the postcode where you’re registered for Self Assessment and your company’s registration number.
How do I find Making Tax Digital software?
You can use two types of software for keeping digital records and reporting your VAT:
- MTD-compatible accounting software: this allows you to track your tax, expenses and income in one place. If you choose one that links to HMRC, you’ll be able to submit your tax return directly.
- Bridging software: if you prefer to keep tax records in a spreadsheet, you can use bridging software that enables you to transfer your data to HMRC.
HMRC has a list of accounting and bridging software that's compatible with Making Tax Digital for VAT. You can use this list to research different options and look up providers to check whether they're compatible.
How do I keep digital records for MTD for VAT?
You need to keep digital records from the start of the your first Making Tax Digital accounting period. These records must include:
- Basic information, such as company name, address and VAT registration number
- Any VAT schemes you use
- VAT on goods and services you supply and receive, so things you sell, lease, hire or transfer as well as what you buy and rent
- The time of supply and value excluding VAT
- Any adjustments to a return
- How much VAT you charge on your goods and service
- Reverse charge transactions – VAT recordings of the sale price and purchase price of goods and services
- Scheme-related information, such as Daily Gross Takings for retail or asset purchases that are eligible for you to reclaim tax on if using the Flat Rate Scheme
- Digital documents that state the multiple transactions that have been made on behalf of your business by volunteers, employees or third-party businesses
Keep in mind that you’ll need to keep these records for 6 years, so it’s best to store them safe using your chosen software or by saving them on your computer, hard drive or cloud-storage system.
Making Tax Digital FAQS
Will I need to submit tax information to HMRC more regularly as a result of MTD?
No, you won't need to submit any more information to HMRC than you already do.
Will Making Tax Digital reduce tax errors?
By allowing you to upload documents and see how much you owe in real-time, MTD should minimise errors and make it easier to calculate your tax throughout the year.
Will MTD mean I spend less time working on my tax?
One of the main aims of Making Tax Digital is efficiency, so it should help you spend less time on your taxes.
How much will MTD-compatible accounting software cost?
HMRC are ensuring that individuals and businesses have free or cost-effective MTD software. And just like your business insurance premiums, you can claim the cost of accounting software against your tax.
Can I still use an accountant with MTD?
Yes, you can still appoint an accountant to check and submit your taxes for you.
Can I still use spreadsheets?
You can still use spreadsheets to keep digital records and work out your tax. But you'll need to use bridging software in order to send the information to HMRC.
Are there any exemptions to MTD?
You can apply for an exemption from Making Tax Digital if it’s not reasonable or practical for you to use computers, software or the internet due to factors like your age, a disability or religious grounds.
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This content has been created for general information purposes and should not be taken as formal advice. Read our full disclaimer.
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