Tape UK : Making Tax Digital
This is a Tape UK guide for small business owners on Making Tax Digital:
What is Making Tax Digital?
HMRC's Making Tax Digital plans involve getting small businesses and the self-employed to complete digital tax records and returns, with the eventual aim of going completely paperless.
HMRC says that Making Tax Digital is how they’re delivering on making it "easier for individuals and businesses to get their tax right and keep on top of their affairs.”
The first phase of Making Tax Digital in 2019 – Making Tax Digital for VAT. This involves keeping digital records and using software (such as Xero) to complete VAT tax returns.
Eventually, keeping paper records won't meet the requirements of tax legislation.
Making Tax Digital Deadlines
HMRC is introducing Making Tax Digital gradually. Making Tax Digital for VAT started from 1 April 2019, affecting VAT-registered businesses with a taxable turnover above the VAT threshold of £85,000.
Next all VAT-registered businesses will need to comply with Making Tax Digital for VAT from April 2022.
And from April 2024, Self-Assessment taxpayers will need to comply with Making Tax Digital for income tax. This was originally scheduled for April 2023; however, the government made the decision to push this back by a year to allow businesses more time to prepare after the challenges of the pandemic.
Here are the Making Tax Digital deadlines:
- April 2022: Making Tax Digital will be compulsory for businesses with a turnover below the £85,000 VAT threshold
- April 2024: Making Tax Digital will apply to taxpayers who file income tax Self Assessments for business or property income of more than £10,000 a year
'More complex' businesses include trusts, 'not for profit' organisations that are not set up as a company, VAT divisions, VAT groups, those public sector entities required to provide additional information on their VAT return (such as government departments and NHS Trusts), local authorities, public corporations, traders based overseas, those required to make payments on account and annual accounting scheme users.
Making Tax Digital for Business
Now Making Tax Digital only affects VAT registered businesses – but eventually, all businesses will have to comply.
Making Tax Digital for VAT
VAT-registered businesses with taxable turnover above the VAT registration threshold (£85,000 currently) now need to keep digital records and send digital VAT returns. For lots of businesses, this means from accounting periods starting on (or after) the 1 April 2019 Making Tax Digital deadline.
If your business has a taxable turnover below the VAT threshold, you can still sign up to Making Tax Digital voluntarily. HMRC encourages this, claiming the software will help you "better understand how your business is performing."
In August 2020, the government announced that businesses below the VAT registration threshold would have to use Making Tax Digital starting in April 2022.
HMRC says the digital records you need to keep include:
- business name and contact details
- VAT number and details of any schemes used
- VAT on supplies made and received
- adjustments to returns
- time of supply (tax point)
- rate of VAT charged on supplies made
- reverse charge transactions (if your software doesn't record them, you need to record them twice as a supply made and a supply received)
- daily gross takings (DGT) if you use a retail scheme
- purchases of assets you can reclaim tax on if you use the Flat Rate Scheme
- value of sales made and total output tax on Gold Accounting Scheme purchases (if applicable)
- documents covering multiple supplies made or received on behalf of your business (by volunteers, third party businesses or employees)
You should use compatible software to submit your returns (see examples of compatible software below). This will pull information from your digital records, which need to be preserved for up to six years.
You can use spreadsheets to calculate or summarise VAT transactions and work out what information you need to send to HMRC. But ultimately, you'll need to use compatible software to send that information.
You might also need what HMRC calls 'bridging software', which converts your records to the right format before you submit.
Making Tax Digital for Sole Traders
Making Tax Digital for income tax will launch properly in April 2024 for self-employed people and landlords who make over £10,000 annually.
This is a year later than originally planned – HMRC announced the delay saying they want to give businesses more time to get ready for the changes as we emerge from the Covid-19.
So, while it's not compulsory (yet), if you fill in a Self-Assessment tax return, you can sign up for the pilot scheme.
The pilot lets you keep records digitally and send income tax updates to HMRC instead of filing a Self-Assessment tax return. The government estimates that so far, around 30 per cent of businesses and landlords have signed up voluntarily.
HMRC says it will lead to a more real-time system, which lets you see how much income tax you owe as you go. Signing up will also give you time to get used to the process before the 2023 deadline.
Both sole traders with income from one business and landlords who rent out UK property (excluding furnished holiday lettings) can sign up.
You'll need to use compatible software to keep records and send an income and expenses summary to HMRC every three months. You'll be able to see estimates of how much tax you'll owe.
At the end of the accounting year, you'll send a final report and your tax for the year will be calculated. This is the point at which you'll claim any allowances and reliefs.
Making Tax Digital for Corporation Tax
There's not much information about when (and if) Making Tax Digital will be introduced for Corporation Tax. HMRC is waiting to see how the full VAT rollout goes first before making any decisions.
Making Tax Digital for Landlords
If you make more than £10,000 a year from your rental properties, you will need to sign up for Making Tax Digital by April 2024.
Now, you can join the scheme voluntarily, should you wish to.
Making Tax Digital Software
Businesses will need to use compatible software to send digital tax returns. Your digital records don't all have to be on one piece of software, but HMRC says that you “must have links between the software you use by your first VAT period after 1 April 2021.”
Some of the ways you can link software includes by emailing records, linking cells in spreadsheets, and downloading and uploading files.
The product you use to submit digital tax returns needs to be compatible with the tax authority. You are welcome to use the likes of Xero, Quickbooks, Free Agent and Zoho etc.
What Do You Need to Do?
If your business is VAT-registered and you’re not following Making Tax Digital for VAT rules already, you will need to use Making Tax Digital-compatible software to store your business records and submit VAT returns for all your business’s VAT periods starting on or after 1st April 2022.
To do this, you will need to complete the following steps before your first VAT period starting on or after 1st April:
1. Sign up to Making Tax Digital-compatible software, like FreeAgent, Xero etc. If you have a business current account with Natwest or a business account with Mettle, you can get a software like FreeAgent for free, for as long as you retain your account.
2. Sign up to Making Tax Digital on HMRC's website. You'll receive an email within 72 hours to confirm that you can submit VAT returns using your chosen software.
3. Connect your Making Tax Digital-compatible software with HMRC to allow it to file VAT returns on your behalf. You will need to enter your VAT registration details.
4. Prepare your accounts for Making Tax Digital for VAT in your Making Tax Digital -compatible software.
Your start date is the date from which you started keeping your information in the software.
Your start date can have an impact on your VAT returns, so it’s important that you check that this is correct.
To view or change your start date on your software, normally select ‘Settings’ from the menu and then select ‘Accounting Dates’ in the ‘Accounting, Tax & VAT’ section.
Check Your VAT Settings
You should ensure that your VAT registration details have been entered correctly and check your first VAT return period end date.
Record Your Opening Balances
You will need to record the opening balances from when you began to use the accounting software. The way you need to enter your VAT opening balance depends on whether your start date is at the beginning of a VAT quarter.
Ensure That All Your Transactions Are Recorded
To create a VAT return, you need to have the details of your bank transactions, invoices, bills and out-of-pocket expenses.
Other Things to Remember
By enabling bank feeds and regularly explaining your imported bank transactions, the bank balance should match the balance in your online bank account.
You might have data that you need to enter from a time prior to the period covered by the VAT return that you’re filing.
You should enter this data before you file your VAT return because after you file it, the accounting software may lock earlier periods and they will no longer be editable.
If you have any questions or queries, please do hesitate to contact our team on accounts@tapeuk.com and we’d be more than happy to assist.