HMRC is making it easier for businesses to get their tax right and keep on top of their tax affairs.
HMRC’s ambition is to become one of the most digitally advanced tax administrations in the world and Making Tax Digital is a key part of the government’s plans to make it easier for individuals and businesses to get their tax right and keep on top of their affairs. Read on to find out what this means for you.....
What is ‘Making Tax Digital?’
Making Tax Digital (MTD) is the biggest shake up on how we interact with the UK tax system since the introduction of Self-Assessment back in 1991. According to HMRC, their prime reason for making the changes is to make the tax administration service more effective, more efficient and easier for taxpayers to get their tax right.
When is it happening and what does it mean?
Whether you welcome the changes or are cynical of the motivation of HMRC, the reality is that it will happen at some point. Whilst the first attempt to bring in the changes only resulted in MTD for VAT going live in April 2019, there seems to be real determination for the following timeline to be adhered to by HMRC.
When is it happening and what does it mean?
MTD for VAT
VAT-registered businesses with a taxable turnover above the VAT threshold (£85,000) are now required to follow the Making Tax Digital rules by keeping digital records and using software to submit their VAT returns.
If you are below the VAT threshold you can voluntarily join the Making Tax Digital service now. However, the next big step will mean that VAT-registered businesses with a taxable turnover below £85,000 will be required to follow Making Tax digital rules for their first return starting on or after April 2022.
Making Tax Digital for Income Tax
Self-employed businesses and landlords with annual business or property income above £10,000 will need to follow the rules for MTD for Income Tax from their next accounting period starting on or after 6 April 2024. The income figure is the total income before offsetting any expenses so this is not a large amount, and the £10,000 is for all income so if you have £6k of rental income and £9k of self-employed income you will fall under the new rules.
Making Tax Digital for Corporation Tax
The government will provide businesses with an opportunity to take part in a pilot for Making Tax Digital for Corporation Tax in the future but don't plan to introduce it before 2026.
What exactly do you have to do for MTD for Income Tax?
MTD for Income Tax is easily the most contentious area that will create some massive challenges for businesses and individuals and that is why we are talking to small businesses about it now, so we can work with them to guide them through the process and help make the transition as painless as possible.
Becoming MTD-compliant is not just about choosing the right software. You will need to also look at how you keep your records now and how your processes need to change to meet the requirements, so that you can provide the right information at the right time with ease. Maintaining business records are an important part of running your business, but the processes you use to keep them should be working hard behind the scenes, not running you!
Here are 5 steps that you need to take:
What action can you take now?
Get a separate bank account
- This doesn't need to be a formal business account, use a spare one or open a current account with a bank that doesn't offer business bank accounts.
- Look for low/no charge accounts, for longer than 12-18 months.
- If you don't want to go to the high street banks, look at some of the online only digital accounts. They are set up to speak to software like Xero and FreeAgent and some offer their own record-keeping functions.
- Make sure you sign up for online banking so you can access your bank account easily and download electronic statements.
Get into a monthly routine
- If you keep paper records, organise your receipts and invoices into monthly envelopes along with a copy of your bank statement when it arrives. If you write it up on a sheet, do this monthly.
- Consider moving to spreadsheets.
- If you already use spreadsheets, update these monthly. Consider downloading your bank statements from your bank in a CSV/Excel format (most banks do this now) and instead of entering the information into a new spreadsheet, enter the additional description alongside each transaction to describe what it was for.
- Consider keeping your records within software. Start with connecting your bank so you can pull the information across automatically. All you have to do is decide what it relates to.
Speak to an accountant
If all of this feels overwhelming, start by talking to an accountant.
We are currently helping both existing and new clients, working with them to move them towards MTD with ease. First we help them create an action plan and then we work with them over the next few years to support this transition to a smarter way of working.