Have you heard of Making Tax Digital? Do you know what it is and when will affect you?
If the answer is ‘no’, then you’re in good company. Nearly half the respondents in a recent survey of businesses done by the Institute of Chartered Accountants in England and Wales had not heard of Making Tax Digital (‘MTD’).
So for those of you who would like to know what it is and whether you need to prepare for it, here’s a bite-sized introduction:
What is MTD?
Making Tax Digital (‘MTD’) is the government’s initiative to streamline and digitalise tax reporting. Over the next few years all businesses and some individuals will need to become MTD compliant.
Businesses will need to keep digital records of their transactions and submit tax returns direct to HMRC through MTD-compatible software. MTD for businesses will also introduce quarterly reporting for self-employed business owners.
What is digital record keeping?
The MTD record-keeping regulations relate to how a business records its day-to-day income and expenditure. Digital records can be kept using accounting software, for example Sage, Quickbooks, Xero, or excel. However if you use excel then you would also need compatible bridging software in order to submit tax return information to HMRC.
When will it affect me?
1. VAT registered businesses
MTD begins on 1st April 2019 with MTD for VAT. This will be mandatory for all VAT registered businesses with a turnover above the VAT threshold (currently £85,000). This includes sole traders, partnerships, companies, charities. These organisations will need to maintain digital accounting records from their first VAT return beginning on or after 1st April 2019. From this date VAT returns will need to be submitted direct digital accounting records using compatible software.
MTD for VAT may be extended to all VAT registered businesses, even those who are voluntarily registered, from April 2020.
2. Sole traders and partnerships
The provisional start date for MTD for income tax is April 2020. From this date sole traders and partnerships will need to keep digital accounting records. HMRC also plan to introduce quarterly income tax reporting with an annual reconciliation after the year end. This will present a big change for many business owners in what they use to record business transactions and how often they update their records.
No changes are being made to the income tax payment and filing deadlines or to the level of detail submitted to HMRC.
You may also need to keep digital records if you have other sources of non-employment income, even if you don’t consider it to be a formal business. Examples of this would be rental income or occasional freelance work. It is expected that there will be a minimum income threshold so that MTD won’t be mandatory for individuals with low levels of income, however this threshold amount hasn’t been confirmed.
4. Limited Companies
The start date for Limited Companies hasn’t been set yet. It is likely to start shortly after MTD for income tax, and will follow the same quarterly reporting model.
What do I need to do to prepare?
The good news is that if you’re currently using commercial accounting software it is very likely that your software will be compatible with MTD. Widely-used providers such as Sage, Xero, Quickbooks and Freeagent have all stated that they will be MTD compatible.
Here’s a link to HMRC’s website listing software providers who are supporting MTD for VAT: https://www.gov.uk/government/publications/software-suppliers-supporting-making-tax-digital-for-vat/software-suppliers-supporting-making-tax-digital-for-vat
If you use an accountant or bookkeeper they should be helping you work out when MTD applies to you and helping make the transition as smooth as possible for you.
If you’re using paper or excel records then now is the time to think about how and when you move towards digital record-keeping. There are great advantages to using accounting software for recording your income and expenses including time savings, accuracy of information and easy reporting. Talk to your accountant or bookkeeper now about options relevant to your business.
Want to know more?
Still want to know more?