Guide to Making Tax Digital

Making Tax Digital (MTD) is a government initiative that is changing the way businesses in the UK keep records and submit tax returns. MTD requires businesses to keep digital records of their income and expenses and to submit VAT returns quarterly using software that is compatible with MTD.

Why is Making Tax Digital being introduced?

MTD is being introduced to make it easier for businesses to get their tax right. By requiring businesses to keep digital records and submit returns electronically, MTD will help to reduce the number of errors in tax returns and make it easier for HMRC to identify and investigate tax evasion.

HMRC also believes that the move to digital records and submissions will help to reduce the administrative burden on businesses, freeing up time for them to focus on growing their business.

Key requirements for Making Tax Digital?

The key requirements for Making Tax Digital are as follows: 

  • Businesses must keep digital records of income and expenses using accounting software 
  • VAT Returns must be submitted quarterly using HMRC-recognised software that is compatible with MTD 
  • Businesses must maintain records of their sales and purchases, including details such as customer and supplier names and addresses, invoices, and transaction dates. 
  • HMRC may require businesses to use specific software to comply with the requirements of MTD

Who is affected by Making Tax Digital?

Making Tax Digital applies to businesses with taxable income over the VAT registration threshold of £85,000. This includes sole traders, partnerships, and limited companies. Businesses below the threshold may still choose to comply with MTD if they wish.

Key requirements for Making Tax Digital?

The key requirements of Making Tax Digital are:

  • Keep digital records of your income and expenses.
  • Use software that is compatible with MTD to submit VAT returns quarterly.
  • Submit your VAT returns on time.

Time and Dates for Making Tax Digital

MTD for VAT: MTD for VAT was introduced in April 2019 for businesses with a taxable turnover of over £85,000. In April 2022, MTD for VAT was extended to all VAT-registered businesses.

MTD for Income Tax and Self Assessment: MTD for Income Tax and Self Assessment is currently only a requirement for businesses with annual turnover above £100,000. However, it is expected that MTD for ITSA will be extended to all businesses.

If you are a business that is affected by MTD, you will need to start keeping digital records and submitting VAT returns quarterly using software that is compatible with MTD. You can find more information about MTD on HMRC’s website.

How can I comply with Making Tax Digital?

There are a number of ways to comply with Making Tax Digital. You can:

  • Use an MTD-compliant accounting software package.
  • Use HMRC’s Making Tax Digital for VAT service.
  • Use a combination of MTD-compliant software and HMRC’s Making Tax Digital for VAT service.

Benefits of Making Tax Digital

Making Tax Digital is a significant change for UK businesses, but it also provides an opportunity to improve efficiency and accuracy when it comes to managing taxes. By understanding the requirements of MTD and preparing for implementation, businesses can ensure compliance and take advantage of the associated benefits. 

Making Tax Digital has a number of benefits for businesses. It can help businesses to: 

  • Reduce the amount of paperwork associated with tax returns 
  • Save time by making it easier and quicker to submit VAT returns electronically 
  • Improve accuracy, as mistakes are less likely when using digital records and software 
  • Reduce the risk of investigation by HMRC, as digital records are easier to audit. 
  • Gain greater visibility and control over their finances with detailed reporting capabilities. 

The Challenges of Making Tax Digital:

Setting up a limited company comes with both advantages and disadvantages. Private companies are generally more flexible regarding regulations, but they may be unable to access specific sources of capital. 

On the other hand, public companies can issue shares on the stock exchange, have more complex financial rules, and require higher levels of disclosure than other types of businesses. 

Advantages of a Private Limited Company

  • The cost of implementing MTD.
  • The need for businesses to change their processes.
  • The risk of data security breaches.

Getting help with Making Tax Digital?

If you are struggling to comply with Making Tax Digital, there are a number of sources of help and advice available. HMRC offers guidance on its website, as well as support for businesses in the form of webinars and workshops.

There are a number of ways to get help with Making Tax Digital. You can:

  • Visit HMRC’s Making Tax Digital website.
  • Contact HMRC’s Making Tax Digital helpline.
  • Use the services of an accountant or bookkeeper.

Frequently Asked Questions

What is the difference between Making Tax Digital for VAT and Making Tax Digital for Income Tax and Self Assessment?

Making Tax Digital for VAT is a requirement for all VAT-registered businesses, regardless of their turnover. Making Tax Digital for Income Tax and Self Assessment is only a requirement for businesses with annual turnover above £100,000. However, it is expected that MTD for ITSA will be extended to all businesses.

What are the different types of MTD-compliant software?

There are two main types of MTD-compliant software

  1. Software that is designed specifically for MTD. This software will typically include all of the features that are required to comply with MTD, such as the ability to keep digital records and submit returns electronically.
  2. Software that is not specifically designed for MTD but which has been updated to be compatible with MTD. This software may not include all of the features that are required to comply with MTD, so businesses may need to use additional tools or services to ensure that they are fully compliant.

What are the different ways to submit VAT returns under Making Tax Digital?

There are two main ways to submit VAT returns under Making Tax Digital

  1. Using HMRC’s Making Tax Digital for VAT service. This service is free to use and is available to all VAT-registered businesses.
  2. Using software that is compatible with MTD. This software will typically allow businesses to submit their VAT returns electronically.

What are the penalties for non-compliance with Making Tax Digital?

The penalties for non-compliance with Making Tax Digital can be significant. The penalties for late or inaccurate returns can be up to £1,000 per month. The penalties for not keeping digital records can be up to £500 per month.

Conclusion

Making Tax Digital is a significant change for businesses in the UK. However, it also offers a number of potential benefits. By keeping digital records and submitting returns electronically, businesses can help to reduce the number of errors in their tax returns and make it easier for HMRC to identify and investigate tax evasion.

Secure Your Financial Future 

Get the Professional Accounting & Tax Management Services

Guidebook

Book An Appointment