Tax can be a complicated thing to manage, and when it comes to your own tax, digital software can really help. The UK government’s new Making Tax Digital initiative can be a major boon to companies in almost any industry, but doing it correctly is the important part.
We at TaxBite offer a range of tax services, from general income tax administration to more specific tax legislation assistance. Having worked with so many individuals’ and companies’ tax affairs in the past, we’re fully capable of helping you shift to the new Making Tax Digital plans.Find Out More
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Making Tax Digital (MTD) was introduced by HMRC to provide digital online tax services to the public. In its current state, MTD for VAT is already in widespread use, with others slowly changing over as well.
This initiative is attempting to simplify tax by making the process entirely digital and online where possible, as well as providing more ways to check for accuracy or errors. It also loosens the penalty system slightly, taking the stress off a small business owner or sole trader.
The government announced four stages to Making Tax Digital, which will be rolled out individually.
MTD for VAT is already active, and is meant to help businesses tax ‘right’. This applies to VAT-registered businesses and will be explained in-depth during this article.Contact Us
April 2024 brings MTD compatible software for income tax. This applies to self-employed people, the owners of small businesses, and other smaller-scale tax targets. This also applies to the property income of landlords with at least one UK property.
The system is meant to make a self-assessment tax return much easier and increase accuracy in digital tax returns overall.
April 2025 will bring income tax for partnerships with individual partners. This is similar to the previous step, only with more of a focus on partnerships rather than self-employed people or a small business.
Making Tax Digital for corporation tax takes MTD compliant software and applies to corporations. The exact date for this hasn’t been set yet, but Making Tax Digital for corporation tax is still being developed so that it will all function properly.
MTD requires the use of digital records for things like taxable turnover, while also providing different systems for different tax and VAT “groups”. It attempts to streamline the process of a business filing tax details while still checking for accuracy and errors.Get In Touch
Solo traders get the same basic outcome as normal tax systems, only with a much simplified process. This makes the entire issue of struggling to file taxes a lot less of a concern, and can even speed up the process dramatically.
This includes landlords, although later stages of MTD will have additional rules and laws that they need to follow. These are specific to property owners making property income in the UK, meaning most landlords.
Small businesses get more leeway to make mistakes while also finding information like taxable turnover much easier, allowing a smaller business to file their taxes quickly and efficiently. The online systems makes this especially convenient for digitally-focused companies.
Larger businesses also share the same benefits, although they may be under even more tax rules when the next stages of MTD roll out. Either way, they can also enjoy the simplified process.
Corporations come under the most restrictions here, getting more focus on their errors. However, most of the rules here still haven’t been implemented – they will come in a few years when the rest of the MTD system is in place.
Making Tax Digital officially began in April 2022, applying only to VAT registered businesses on their VAT. How to check if a company is vat registered.
In April 2024, self-employed businesses and small business owners will be counted under Making Tax Digital too, and by 2025 it will apply to families as well. In 2026, corporation tax is planned alongside all of the other variants.
Making Tax Digital is a government initiative designed to provide enhanced functionality and simplicity when handling tax, including a simple VAT return. So far it only applies to VAT/VAT registered businesses, but even now the system has its benefits.
Owners of small businesses completing a return under Making Tax Digital see benefits like:
Through this, Making Tax Digital software increased accuracy and reduced time spent reporting. It also provides more ways to get the tax right, enabling quicker error-checking.
As of now, the Making Tax Digital system is only to file VAT returns, but it will be connected to the Income Tax Self-Assessment return process by 2024. You can keep up with Making Tax Digital news through official government channels.
All businesses have to comply with Making Tax Digital (MTD) for VAT rules. There are limited exemptions to Making Tax Digital rules, which are mostly for those who cannot use the Making Tax Digital system due to lack of a usable computer/internet connection.
Making Tax Digital (MTD) for VAT applies to limited companies, sole traders, partnerships and UK landlords. Making Tax Digital (MTD) for VAT also covers trusts and charities in the same way.
If you are not a VAT registered business, or do not meet the VAT registration threshold, then Making Tax Digital (MTD) VAT return rules do not apply. Only VAT registered businesses need to take part in Making Tax Digital for VAT.
By April 2024, Making Tax Digital for Income Tax Self-Assessment (MTD ITSA) will come into effect. This will apply to the income of all self-employed business owners and landlords, even those without VAT-registered businesses.
Making Tax Digital software doesn’t remove the need to keep records for your return. However, these are now digital records, digitally stored for later-reuse. For each item, you will need to record:
You can sign up for the Making Tax Digital system on the UK government website. Signing up will automatically register you for the whole tax system. You can explore this site to learn more about the government’s plans, and to find the latest news on changes to the system.
Remember that not all details of MTD are finalised yet. There may be some times where a certain feature or rule is altered, or the planned release dates for certain elements aren’t met. The government are the only 100% reliable channel to get these updates, so stay well-informed.
To register for MTD vat returns, you need to use:
In addition Sole traders will need a National Insurance number.
Limited companies will need their registration number and Unique Taxpayer Reference, while general partnerships will need their postcode and Unique Taxpayer Reference.
Limited partnerships will need the UTR, postcode and registration number.
In some cases you will also need to provide you tax code if you are uncertain about what tax code you should use then check out our 2 articles full uk tax codes list or if you have received a letter mentioning you are Tax code 1257L then checkout our full guide.
Refusing to follow the Making Tax Digital for VAT returns rules will lead to fines. The new digital records system used a “points” method to hand out penalties, so occasional mistakes will go ignored while frequent major mistakes will ramp up the fines even further.
Failure to comply multiple times in a row – beyond the point of simple mistakes – can get you in serious trouble. MTD is a compulsory change (again, not counting the few exemptions), meaning that you can’t keep using the old methods unless you have no other option and are legally exempt.
While Excel can work for digital tax records, it’s often best to use compatible software with more features. HRMC’s move into one of the largest digitally advanced tax administrations on the planet means that dedicated MTD compatible software might be useful.
Even if you’re used to Excel, using full accounting software and/or bridging software can often be the best choice. Our professional advice is to use MTD compliant software that is specially designed to let businesses speed up their digital record keeping and file VAT returns even faster.
Excel is still a useful tool to have around. Remember that it can be used for all kinds of calculations, so it can still be valuable if you’re needing to make last-minute changes or want to create a basic document that needs to accompany your return.
Making Tax Digital was delayed quite heavily due to multiple factors, including the Coronavirus pandemic. This has left certain sections, such as MTD for income tax, delayed a lot further back than needed.
The exact dates of the full implementation plans aren’t known, but it helps to improve your accounting software and tools ahead of time. Accounting periods for businesses aren’t going to change, so key dates are still relevant even after the switch.
There is a lot of free software that can assist with MTD. Webinars and online tutorials can only get small businesses so far, and even large businesses need to work hard to adjust to the new changes.
There are many free (and low-cost) choices to try out, all of which can benefit businesses in different ways. We can offer the companies working with us a free guide to get them started, and assistance in their annual business and tax matters.
Making Tax Digital for VAT is compulsory. The other stages will also be compulsory when fully added, such as MTD for income tax. The only way to opt out is if you fit into the list of exemptions, which generally includes people who can’t use a computer or online services to file taxes.
You cannot opt out of the MTD for VAT threshold once you pass it. If your small business hits the VAT threshold, then you need to start filling out your VAT returns through compatible software and devices.
The new tax initiative can seem overwhelming at first, but it only really requires some compatible software and an understanding of how the system works. It makes certain pat of the process, such as taxable turnover, much easier to understand as a business owner.
If you want to know more about what we offer, and how we can help both large and small businesses tackle their first MTD Vat Return (along with improving their cash flow and aiding other parts of their business), then get in touch and talk with our experts.
We’re eager to start working with a new set of clients, as we can provide a free guide on how to get started with the new tax systems. No matter how large your business is, we’re here to help.