Everything you need to know about Making Tax Digital

Making Tax Digital (MTD) is going to change the way self-employed people report on their taxes in the UK.

We’ve put together everything you’ll need to know about Making Tax Digital so you can focus on doing what you do best, without stressing about the changes.

Everything you need to know about Making Tax Digital

What is Making Tax Digital?

Making Tax Digital is the name of the Government plan which changes the way UK businesses file their tax returns.

By bringing the entire tax system fully online, HMRC aims to reduce errors and false reporting, in order to set the standard for the rest of the world.

Making Tax Digital is being rolled out in phases. Making Tax Digital for VAT has already started, but it will be quite a while before Making Tax Digital is completely rolled out for income tax.


Who does Making Tax Digital apply to?

The first phase of Making Tax Digital was launched in 2019. This phase is about bringing VAT returns completely online and at the moment, it only applies to VAT registered businesses.

This applies to:

  • Sole traders Partnerships and LLPs Private limited companies

If your business has a taxable turnover above the VAT £85k threshold, you’ll already file your VAT returns quarterly.

With MTD for VAT in place, you’ll need to start using software to digitally complete your records.


Does Making Tax Digital apply to people using the Flat Rate Scheme for VAT?

The Flat Rate Scheme for VAT is when you pay a fixed annual percentage rate of VAT to HMRC based on your turnover.

If you operate the Flat Rate Scheme, you won’t need to keep a digital record of any purchases.


When does Making Tax Digital apply?

The pilot scheme for Making Tax Digital started in October 2018 for any businesses that wanted to take part.

After a successful trial period, MTD for VAT was launched on 1st April 2019 and will be in effect for your first VAT period that started on or after that date.

Some businesses didn't have to comply with Making Tax Digital until October 2019 for a few different reasons, mainly because of how complicated their returns are.

These include:

  • Charities and trusts Public corporations and public sector entities, Local authorities VAT divisions and VAT groups Annual accounting scheme users Anyone based overseas who pays tax in the UK.


Is MTD for VAT compulsory?

Making Tax Digital for VAT returns is compulsory for any VAT registered businesses unless, as mentioned above, a business was deferred to October 2019.

HMRC has acknowledged that this transition period could cause some confusion, so they have stated that they’ll be taking a softer approach to any penalties for the first 12 months.

Be careful though, that doesn’t mean they won’t apply those penalties if they believe they’re necessary.


Are there any Making Tax Digital exemptions?

A lot of small businesses are worried about how difficult it could be for them to manage. HMRC responded to this by looking at a few groups that Making Tax Digital would not apply to.

These are known as the ‘Digitally Excluded’ and are those who aren’t able to use digital software for one of the following reasons:

  • Because of their religion Because of a disability Because of their age Because of the remoteness of their location

You might also be exempt if your gross annual income or turnover of less than £10,000.

Remember, your gross annual income will only matter when Making Tax Digital for Income Tax applies, as it’s likely you won’t be paying VAT on a business of this size.

If you’d like to apply for exemption, you’ll need to call or write to HMRC and they will make a decision.


What is Making Tax Digital software?

In order to file your VAT returns and other tax digitally, you’re going to need to make use of some form of approved accountancy software that is digitally linked to HMRC.

You’re going to need an HMRC-approved method of recording and storing your digital records. Although it currently only applies to VAT, this will expand. Once you have this information, it’ll need to be sent to HMRC.

If you’re not using approved software, you can use bridging software that connects non-compatible software to HMRC systems.

We recommend using approved software where possible – it means you can manage everything from one package and ensure you’re fully compliant.


How do I keep digital records for Making Tax Digital?

If you use a few different programs to manage your accounts, there are two things you should consider:

  • The data must be automatically transferred between programs – You can’t copy and paste the information as it could cause human error. It must be able to store your records

This last line is crucial, as it means spreadsheets alone are no longer sufficient – even sheets that are password protected and use protected cells can be altered at a later date by accident.

In terms of how to record individual entries within your records, there is extensive guidance on the different queries you might have – including on supplies your business makes, reverse charges and more – on the HMRC website.


Will Making Tax Digital actually happen?

In short, yes – it’s already happening, and with the speed of adoption, it's likely that the next steps will be put in place in the next 12-24 months at the latest.

The question “Is Making Tax Digital going ahead?” was a popular topic of discussion even as recently as 2018, as there were doubts that HMRC would push it through with some businesses.

So if you aren’t prepared, regardless of whether the VAT regulations apply, it makes sense to get up to speed as quickly as you can.


What is Making Tax Digital for income tax?

The next step for Making Tax Digital is to introduce the same procedures for Income Tax and Corporation Tax.

There is a pilot running already for Making Tax Digital for Income Tax for any self-employed people or landlords who wish to try it now.

The idea is that any tax administration should be easier and more accurate before.

Although MTD for Income Tax isn’t compulsory, it’s useful for anyone who wants a better idea of what their tax situation much closer to real-time, rather than waiting to fill in a Self Assessment return at the end of the financial year.

As with VAT returns, you’ll need to use compatible software to keep a record of your income and expenses, with a summary sent to HMRC every three months.


VAT Domestic Reverse Charge Delayed until March 21

16 June 2020

A 12-month delay has been announced by the Government for the UK-wide rollout of the new VAT domestic reverse charge within the construction industry. The reverse charge had been set to come into force on October 1st, 2020.

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