Making Tax Digital
What is Making Tax Digital
MTD is a key part of the government’s plans to make it easier for businesses to get their tax right and keep on top of their tax affairs. HMRC’s ambition is to be one of the most digitally-advanced tax administrations in the world, modernising the tax system to make it more effective, more efficient and easier for customers to comply.
Businesses need to keep digital records and use compatible software to send their VAT returns or Income Tax updates to HMRC, and receive information.
Keeping digital records and providing updates to HMRC directly through MTD-compatible software will help reduce errors, cost, uncertainty and worry. This streamlined digital experience will integrate tax into day-to-day business record-keeping, so that businesses can view their tax position in-year and be confident that they have got their taxes right.
Why Making Tax Digital
Increasingly, businesses and agents see the benefits of digitisation. Millions of businesses are already banking, paying bills and interacting with their customers or suppliers online, and many are already using accounting software.
HMRC’s ambition is to become one of the most digitally advanced tax administrations in the world and MTD is making fundamental changes to the way the tax system works – transforming tax administration so that it is:
- more effective
- more efficient
- easier for taxpayers to get their tax right
It is anticipated that the move to digital integration will eliminate many of the existing paper-based processes, allowing businesses and their agents to devote more time and attention to maximising business opportunities, encouraging growth and fostering good financial planning.
Many businesses use an agent and MTD will allow agents to continue to provide a full service in supporting their clients.
The majority of customers want to get their tax right but the latest tax gap figures (2016/17) show too many find this hard, with avoidable mistakes costing the Exchequer over £9 billion a year. The improved accuracy digital records provide, along with the help built into many software products and the fact that information is sent directly to HMRC from the digital records avoiding transposition errors, will reduce the amount of tax lost to these avoidable errors.
Is Making Tax Digital On Hold
In short Making Tax Digital is not on hold.
The primary legislation for MTD relating to VAT and Income Tax is contained in the Finance (No.2) Act 2017, providing certainty about the broad framework in which MTD will operate, with secondary legislation for VAT laid in February 2018, coming into force from April 2019.
There has been plenty of fair warning that this change has been coming.
When is Making Tax Digital Starting
Having listened to concerns about the pace of change, particularly for small businesses, the government announced in July last year that the pace of mandation would be slowed. VAT registered businesses with a taxable turnover above the VAT threshold (£85,000) are mandated to keep digital VAT records and send returns using MTD-compatible software from 1 April 2019.
Following last year’s ministerial announcement, MTD will not be mandated for other taxes until at least April 2020, but businesses can get involved in the Income Tax pilot now on a voluntary basis.
MTD for Income Tax – this pilot is already available for the self-employed with income from one source of self-employment and landlords (except those with furnished holiday lettings). Stakeholders will be able to use the material in this pack for any communications activity promoting the MTD for Income Tax pilot. You can read more about getting involved in the Income Tax pilot below.
Who does Making Tax Digital Apply To
Making Tax Digital for Businesses
Businesses means anyone running an unincorporated business, including sole traders and people who are self-employed, including landlords. We also mean VAT registered businesses and VAT registered entities, such as charities, government bodies and limited companies.
Making Tax Digital for Individuals
Businesses and landlords who join MTD for Income Tax will need to send quarterly summaries of their income and expenses to HMRC using MTD-compatible software. In response they will receive an estimated tax calculation based on the information provided to help them budget for their tax. When we refer to MTD-compatible software, we mean software that can integrate with HMRC systems to send updates to HMRC.
The deadline for making Income Tax payments is not changing.
HMRC are building functionality so that businesses and landlords will eventually be able to send information about all types of income, using software, not just their business/rental income, including things like employment income, bank and building society interest, dividends, gift aid etc. Software developers will continue to build this functionality into their products, resulting in a richer experience for customers as MTD continues to develop.
How is Making Tax Digital Going To Work For VAT
MTD does not require you to keep additional records for VAT, but to record them digitally.
Your digital records should include, for each supply, the time of supply (tax point), the value of the supply (net excluding VAT) and the rate of VAT charged.
They should also include information about the business, including business name and principle business address as well as your Vat Registration Number and details of any VAT accounting schemes you use.
Customers who currently record daily totals can continue to do so, but they have to be captured digitally.
If you use spreadsheets to keep business records you’ll need MTD-compatible software so that you can send HMRC your quarterly VAT returns and receive information back from HMRC. Bridging software may be required to make spreadsheets MTD-compatible.
For full details on how Making Tax Digital for VAT is going to work for VAT please read our Making Tax Digital for VAT blog.
How is Making Tax Digital Going To Work for Income Tax
You’ll have to use software to capture details of all your business income and expenditure for the entirety of your accounting period.
Your business records will include details from invoices and receipts for purchases and as a minimum should include the date, the amount and the category.
Many businesses already use record keeping software and it’s important to check when this software will be MTD-compatible, or find out whether it integrates with other software that can make quarterly submissions (bridging software). If you are unsure about how to enter information into your software, you should speak to your software provider.
If you use spreadsheets to keep business records you’ll need MTD-compatible software so that you can send HMRC your quarterly updates.
The Making Tax Digital for Income Tax pilot is now available on a voluntary basis. It will not be mandatory for businesses until at least 2020.
As part of the Making Tax Digital pilot, self-employed businesses and landlords can voluntarily use software to keep their business records digitally and send Income Tax updates to HMRC, instead of filing a Self Assessment tax return.
This means you’ll see an estimate of how much tax you might owe as you go, rather than waiting until the end of the tax year.
By signing up to HMRC’s secure service, you’re helping to test a new way of working out your tax as part of the Making Tax Digital pilot.
You’ll be able to use software to report your Income Tax if at least one of the following applies:
- you’re a sole trader with income from one business
- you rent out UK property (excluding furnished holiday lettings)
If you have income from any other sources you may still have to report it using a Self Assessment tax return.
How it works
- If you do not already have software to keep your business records, you can choose from a number of options.
- Use your software to keep a record of your income and expenses. If you want to carry on using your current methods to keep your business records, make sure that the software you use to send updates to HMRC can link to this to automatically transfer the data.
- Every 3 months, use your software to send your income and expenses summary to HMRC.
- You can view an estimate of the tax you might owe at the end of your accounting year, based on the information you have provided so far in your business tax accountas well as through your software.
- Send a final report to confirm your income and expenses at the end of your accounting year. If you need to claim allowances and reliefs, you can do this within that final report. You’ll be able to see a tax calculation for the year.
You can also choose to:
- send an update to HMRC more often, for example, if you want to see a more up-to-date estimate of the tax you might owe
- pay your bill as you go, if it makes it easier for you to manage your budget
- ask your accountant to send updates for you
Will HMRC be providing Making Tax Digital Software
HMRC will not be offering its own software products, but will provide the Application Programming Interfaces (APIs) that commercial software developers will use to develop a range of applications that will enable businesses to keep their records digitally and integrate with HMRC systems. An API is software that that links 2 or more software programmes together, allowing them to exchange data.
The benefit of this approach is that commercial software developers can offer a more flexible and tailored range of options, functionality and technical support that can cater not just to the requirements of the general business population but also specific businesses and sectors like agriculture, construction, landlords and freelancers.
Final Thoughts
If you are ready to make the switch to a single API enabled software package and need help and support with a migration then call us today. If you are going to take your chances with spreadsheets, bridging software we wish you all the best.
We are one of the UK’s leading Xero migration experts and help businesses every year make a seamless transition.
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