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Making Tax Digital – an easy guide for small businesses

4 February 2019 Small Business Advice

According to the Office for National Statistics, “89% of adults in Great Britain used the internet at least weekly in 2018, up from…51% in 2006.”

In terms of internet usage, UK is ahead of Germany (86.2%), Japan (86.2%), the USA (84.2%) and France (83.3%).

To maintain this lead and take advantage of digitisation, the government wants UK businesses to move away from paper-based book-keeping and make all tax records and tax returns digital.


What is Making Tax Digital (MTD)?

The government’s plan to make all tax records and tax returns digital is called, Making Tax Digital (MTD).  They want UK businesses to use digital methods to record transactions and file them online onto Her Majesty’s Revenue & Customs (HMRC’s) systems using MTD-compatible software.

This is being introduced in phases, starting with VAT and eventually income  tax. We’ll come to the target dates later…


What types of businesses does it affect?

MTD will affect two types of business.

  1. VAT registered UK businesses.

From 1st April 2019, businesses with a turnover of more than £85,000 a year will be have to submit VAT returns through the new system.

You will no longer be able to key in your VAT data onto the HMRC website. Instead, you will have to keep records digitally and submit VAT returns to HMRC using MTD-compatible software.

HMRC will not be providing the software, it’s up to businesses to upgrade, or buy new software. HMRC claim 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.”

Businesses will no longer be able to keep manual records. Digital records must be maintained in what is defined as ‘functional compatible software’. What this means is software or spreadsheets, or a combination of both, which can connect to HMRC via an Application Programming Interface (API) – and these must capture more information than is currently required.

There is a small minority of deferred VAT-registered businesses with complex requirements, such as VAT groups and trusts. HMRC are currently testing the service with them and have decided to delay making it compulsory until 1 October 2019.

If you have an overseas business and are required to be MTD compliant, you will have to submit your VAT returns digitally to HMRC. You won’t be able to do this via HMRC’s Government Gateway after 1 October 2019.

HMRC has published a VAT Notice, which explains the rules for Making Tax Digital for VAT and about the digital information that must be kept. Double-check to ensure that your new system includes all the information they want.

  1. Individuals and organisations that pay tax and file a tax return in the UK.

If you file a tax return, use an accountant, or get income from any place other than standard PAYE payroll, Making Tax Digital will affect you. But it won’t come into effect until at least April 2020.

According to Which, “This includes self-employed people, landlords, employers, those with an income from abroad, trustees of trusts or a registered pension scheme, and anyone else that files a tax return.”

As with VAT registered businesses, you will have to make all tax records and tax returns digital, so they’re stored and filed online using software that is compatible with HMRC’s systems.

HMRC claim that this will make tax returns more accurate and will solve the ‘tax gap’ shortfall. This is the difference between what tax the Exchequer expected to receive and what was actually paid. HMRC claim that while “the majority of customers want to get their tax right but the latest tax gap figures show that…avoidable mistakes cost the Exchequer over £9 billion a year.” This under-payment is put down to errors and lack of attention when people submit their tax returns.

Under the new income tax rules, you’ll have to use MTD-compatible software to send your income and expenses summary to HMRC every quarter. That way, at the end of each accounting year, you can adjust for any allowances and reliefs before sending your final report.

HMRC has stated that as tax returns will be stored online, people can check their spending throughout the tax year, rather than waiting for a bill. This should give taxpayers control over their budgeting.


When does it happen?

  1. VAT registered UK businesses.

On 1st April 2019: Making Tax Digital is compulsory for all businesses earning £85,000 or more – apart from those that have been deferred.

October 2019: Making Tax Digital is compulsory for the small number of organisations that have been deferred.

  1. Individuals and organisations that pay tax and file a tax return in the UK.

The dates for introducing MTD for further taxes including Corporation Tax for limited companies, and Income Tax and National Insurance for sole traders have been put back to at least April 2020.


Benefits Of Making Tax Digital

Not everyone in the accounting profession feels that MTD will have a positive effect on all businesses. However, most agree that it’s inevitable and will offer benefits in the long-term. Millions of businesses are already paying bills, banking and interacting online. Going digital with business records and taxes is the next logical step.

  1. Going digital will give business more control and better capability to plan their finances.
  2. It will save valuable time for businesses, accountants and HMRC.
  3. If businesses use industry-specific software that’s right for them and is also compatible with HMRC, filing tax returns will be easier and faster.
  4. It reduces avoidable errors and miscalculations in business records that can happen when manual calculations are performed, or information is transposed by hand.
  5. As you don’t have to transpose data, it will save time at the gathering and inputting stage.
  6. More nudges or prompts will be introduced into software, which will dramatically reduce common errors.
  7. Taxpayers will be able to see their complete financial picture in their digital account, just like they do in their online banking.
  8. Business will not have to wait until the end of the tax year before knowing how much they should pay.
  9. To stop tax underpayments or overpayments building up, HMRC will collect and process information affecting tax as close to real time as possible.
  10. Every individual and small business will have access to a digital account.


How do I prepare my business?

To ensure you are ready for MTD, the key steps to follow are;

  1. Make sure you choose software that suits your business, whether you’re in agriculture, construction, or property letting. It’s equally important to ensure that it is MTD- compatible software.

Details of MTD-compatible software products and suppliers for Income Tax and VAT are available on GOV.UK. They claim that this information will be updated as and when new products become available.

  1. Do you currently submit to HMRC’s online Gateway using Excel or paper? Double-check that your current software can be used as it is, or does it need to be modified? Or will you have to buy new software?
  2. Don’t forget to budget for all the costs to implement MTD initially, and thereafter, year-on-year.
  3. If you have staff, train, or get them trained on MTD. Or find an accountant who understands digital technology.

We hope you find this easy guide useful and that the move to MTD proves to be smooth and, ultimately, beneficial to your business.


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