Making Tax Digital (MTD) is a HMRC initiative that will look to modernise the UK tax system by requiring businesses and sole traders to maintain digital records and file their returns through MTD compatible software.
The first phase of MTD was 1 April 2019 where VAT registered businesses earning more than the VAT registration threshold (£85,000) will be required to file VAT returns, for periods starting after this date, through MTD compatible software.
However, the end goal of MTD will be to bring an end to the annual Self Assessment by also requiring businesses and individuals to keep digital records for Self Assessment and to file this digitally quarterly. This is set to be mandated, at the earliest, by April 2021 (recently delayed from 2020).
So, with a lot of businesses already being impacted by MTD, and the scope of the initiative set to increase in the future, what’s important for the self-employed to know?
1. It’s intended to make doing your taxes easier
In the words of Mel Stride MP, Financial Secretary to the Treasury, MTD aims to “create one of the most digitally advanced tax authorities in the world.”
That said, while putting the UK tax system on a pedestal for all the world to see, the more cynical observer might think, what’s the benefit for me? Some small businesses, for instance, might see it as a major inconvenience – changing the way they have been doing their books for years. However, a lot of businesses will see benefits in the long run, as MTD will mean they won’t have to re-key information onto HMRC’s website, and instead, they can file directly from their accounting software.
2. You will receive penalties if you don’t comply
In the Spring Statement, Philip Hammond confirmed that HMRC would take “a light-touch approach to penalties in the first year of implementation”. However, what this doesn’t mean is that there will be a blanket approach and no penalties will be issued, as businesses must be “doing their best to comply”.
Further to this, you must always ensure that your VAT bill is paid on time, as if you haven’t filed the VAT return compliantly and you also haven’t paid it on time, it would be safe to assume that you would receive a penalty notice.
So, to avoid the risk of any potential penalties, it is best to comply as soon as MTD is applicable to you.
3. You will need MTD-compatible software
So how do you become compliant? The first step would be to explore the right software for you, so you can keep these digital records and send returns directly to HMRC (without re-keying in the data). There is a vast growing number of software options that you can use that are compatible with MTD for VAT. HMRC have a page of these that you can search through.
A few of these more costly cloud-based options will not just help you with MTD compliance, but also have plenty of other features such as invoice generation, bank integrations, payroll submissions, forecasting and generally a better overview of your company financials.
4. But your software doesn’t need to be costly
If you don’t have a requirement for the features mentioned above, and you simply want to be compliant with MTD, then you may want to investigate a much cheaper alternative, which would be a ‘bridging software’.
Bridging software would allow you to keep your records still in a spreadsheet format, for example, and then just use the bridging software to submit information to HMRC (as it’s still MTD compliant and links to HMRC’s systems).
You can incorporate this bridging software into your current business bookkeeping records, so you still have the ability to file your VAT returns to HMRC.
If you’re struggling to determine which type of software is best for you, it’s worth pointing out that many offer a free trial (usually a good sign that they’re confident in their product!). So, the best approach is to do your research to look at what’s available and test what is better suited to your business needs.
5. You can sign up to a pilot scheme for Income Tax
While we have mainly covered MTD for VAT, we do know that MTD will eventually (2021 at the earliest) be mandated for Income Tax too. If you did want to see how this would work, HMRC allows you to sign up to a pilot scheme to test the service for Income Tax. This involves voluntarily using software to keep digital records of your income and expenses and sending them to HMRC, instead of filing a Self Assessment tax return. This allows you to test out this way of working out your taxes, while seeing an estimate of how much tax you’ll owe throughout the year, instead of waiting till the end of the tax year.
Taking part in the pilot scheme involves using the software to link to HMRC and sending your income and expenses summaries to the government department every three months. You’ll also finalise your income and expenses at the end of the accounting year. You’ll be reminded when you need to send updates. There’s also the option to send updates to HMRC more often, if you prefer.
6. It’s better to plan ahead with becoming compliant
If you know that you will need to start keeping digital records – for example, you may know that you’ll be going above the VAT registration threshold in the near future – then it may be better to plan ahead.
This way you can ensure you are compliant well before your filing deadline and avoid any last minute stress in trying to file compliantly. It may also be worthwhile for you to look into becoming compliant from the start of your business year, so that you don’t end up switching your bookkeeping method in the middle of the year due to MTD, and then need to duplicate your earlier year records into a new system.
If you’re anxious about doing tax digitally and what MTD means for you, you should seek assurance from an expert, like an accountant. They should be able to point you in the right direction, considering your business and its needs, tell you what you need to know, what you need to do, and give you peace of mind.