Making Tax Digital - overview

In recent years the government started phasing in its landmark Making Tax Digital (MTD) initiative. It also outlined a vision to modernise the UK’s tax system, with digital tax accounts replacing tax returns for ten million individuals and five million small businesses.

As part of the regime, taxpayers must move to a fully digital tax system, with businesses and individuals required to register, file, pay and update their information using a secure online tax account.

Businesses will eventually be required to supply up-to-date information in respect of their income tax and national insurance contributions (NICs). Updates will need to be made at least quarterly.

Making Tax Digital for VAT

Under the rules, businesses with a turnover above the VAT threshold (currently £85,000) must keep digital records for VAT purposes and provide their VAT return information to HMRC using MTD functional compatible software. 

Only a small handful of businesses are exempt from complying with Making Tax Digital for VAT (MTDfV). Please contact us if you believe your business may be exempt. Businesses are able to make an appeal against a HMRC refusal of exemption.

VAT returns 

Those businesses that fall within the scope of MTDfV are required to submit their VAT returns using software compatible with the MTDfV regulations. Information will be extracted from the digital records in order to populate the VAT return. 

The changes introduced as part of the MTDfV project do not affect the statutory VAT return deadlines or payment dates, and businesses who choose to submit VAT returns monthly or annually can continue to do so.

Using third party software and keeping digital records

HMRC do not provide MTDfV software, and manual record keeping is not acceptable. Businesses must keep specified records in ‘functional compatible software’, which calculates the VAT return and submits it to HMRC via an Application Programme Interface (API).

MTD for VAT 2021: digital links

Businesses already mandated into MTDfV should remember that from their first VAT return period beginning on or after 1 April 2021, they must have digital links in place between all parts of their functional compatible software. A digital link is an electronic or digital transfer, or exchange of data, between software programmes, products or apps. 

MTD for VAT 2022

From April 2022, MTDfV is mandated for all VAT-registered businesses. This means that even voluntarily registered businesses, trading below the current £85,000 compulsory VAT registration threshold, will have to keep the requisite digital records and file digitally. If this affects you, and you would prefer to consider deregistering for VAT, we are happy to discuss this with you. Note, too, that there are some (limited) grounds for exemption from MTDfV.

MTD for Income Tax Self Assessment 2024

MTD for Income Tax Self Assessment (MTD for ITSA) means major change: more involvement with HMRC on an ongoing basis, more deadlines, more filings and more input from HMRC in return. The yearly timetable will feel very different until the system becomes familiar. The income tax rules themselves, other than those relating to recordkeeping, aren’t changing. 

MTD for ITSA will apply to unincorporated businesses and landlords with total annual business or property income above £10,000 for the first accounting period starting on or after 6 April 2024. Initially it had been announced that these new regulations would come into force from April 2023, but it has been delayed until April 2024 to give businesses sufficient time to prepare for the changes.

Partnerships will not enter into MTD for ITSA until April 2025 and MTD for ITSA will not apply to Trusts, Estates, Trustees of Pension Schemes or non-resident companies.

Businesses and landlords in MTD for ITSA must keep accounting records digitally, using software or a spreadsheet. They will be required to send a summary of business income and expenses to HMRC each quarter. As well as these four quarterly filings, there will be digital end of year finalisation.

Please contact us for further details on MTD for ITSA.

Cloud accounting

Cloud accounting services are the simple way of enabling software to be stored and accessed online. This way of accounting serves similar functions as accounting software that would be stored on your computer but is hosted on remote servers.

There are many benefits of making use of cloud accounting. Its ease of access is one of the primary advantages associated with cloud-based accounting: with these services, you and your employees will be able to access essential data anywhere at any time.

Your data is securely stored and backed-up in the cloud: you will not be filling up valuable storage space on your hard drive. Cloud accounting services utilise real time information, meaning that your data will always be up to date and current.

It is clear to see that cloud accounting is the way forward: its ease of use, accessibility and cost effectiveness ensures that it remains a popular choice for many businesses.

Walker Moyle support most cloud accounting software packages which our clients use, including Xero, QuickBooks, Sage and others.

We can explain the MTD rules and how they affect your business or personal circumstances. Simply contact us today for practical advice and guidance.

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