Overview of Making Tax Digital
Making Tax Digital (MTD) is the UK governments initiative to modernise the UK tax system. Making Tax Digital aims to make it easier and more efficient for businesses and individuals to record and declare tax to HMRC. Under the new rules, HMRC legally requires eligible businesses to record transactions digitally and submit returns to HMRC using MTD compatible software.
Making Tax Digital not only affects individuals, sole traders, landlords, partnerships, contractors but also small business and large business as well as other organisations and how they maintain their accounting and tax records as well their communication with the HMRC. These changes encourage businesses to step away from paper records and maintain digital records instead. MTD requirements are that the majority of business owners and organisations to maintain and submit digital tax records using MTD compliant software.
What does Making Tax Digital involve?
Making Tax Digital requires individuals and companies to:
Under the Making Tax Digital initiative, businesses can no longer use manual record keeping and all records need to be maintained in functional compatible software which can connect to HMRC’s interface.
A phased rollout of MTD is already in progress, however, HMRC continues to shift and change implementation dates for the various phases of the MTD plan.
Making tax digital timeline
Making Tax Digital for VAT applies to all VAT registered businesses, whether you are above the VAT threshold or voluntarily registered for VAT. You are required to submit MTD for VAT digital returns.
The new tax legislation doesnt change your normal VAT return deadlines or the information you need to send. You can check when your next return is due on your online VAT account.
Making Tax Digital for Income Tax will apply to self-employed individuals and landlords with income over £50,000.
From April 2024 companies can start using an MTD for Corporation Tax (CT) pilot scheme.
From April 2026 companies join MTD for Corporation Tax.
In 2022, the government announced the delay in Making Tax Digital for Income Tax Self Assessment (MTD for ITSA). MTD for ITSA will apply to self-employed individuals and landlords with income over £30,000.
HMRC will review smaller self-employed business to decide if they will be required to join.
General & other partnerships will join MTD, but no timetable has been set.
Keeping MTD digital records
If you already use software to maintain your financial records, ask your software provider whether their software is MTD compatible. If not, you’ll need to look at alternative software options.
Nomisma, the online accounting software provided by dns accountants is fully MTD compatible software. You can find details of all MTD compatible software here.
Making Tax Digital compatible software is required to:
You will no longer be able to just maintain financial records in paper form.
Making tax digital software
Why you need Making Tax Digital software
All VAT-registered businesses must keep digital records & submit VAT returns using MTD compatible software.
Choosing HMRC-recognised MTD software
It’s important to choose software that’s 100% HMRC-recognised, MTD-compliant and easy to use.
Benefits of Making Tax Digital software
MTD compatible software can provide additional benefits. For example, have up to date financial information at your fingertips 24/7, make invoicing and your bookkeeping easier and provide you with great reporting.
MTD bridging software
MTD bridging software is designed for those who want to keep using spreadsheets instead of full MTD software. However, our advice would be to switch to a full online software solution such as Nomisma accounting software that dns accountants provide.
Making Tax Digital for VAT
If you have a VAT registered business, you are now required to keep digital records and file your MTD VAT returns using compatible software.
HMRC will sign up all remaining businesses to Making Tax Digital for VAT automatically unless they are exempt or have applied for exemption.
Making Tax Digital for Income Tax
You need to follow the requirements for Making Tax Digital for Income Tax (MTD for ITSA) if you are self-employed or a landlord from:
Some businesses and agents are already keeping digital records and providing updates to HMRC as part of a live pilot to test and develop the Making Tax Digital for Income Tax. If you are a self-employed business or landlord, check if you can voluntarily sign up now through your software provider.
Benefits of making tax digital
MTD late submission penalty system
The new penalty systems applied to Making Tax Digital for VAT submissions as of 1 January 2023.
Once Making Tax Digital for Income Tax begins the new penalty systems will apply to that too.
The new penalties were also intended to include Self Assessment taxpayers but following the delay to Making Tax Digital for Income Tax, announced in December 2022, there’s currently no start date for those with income under £30,000.
The new late submission system is based on a points system. After a certain number of points are reached by a business or individual, a financial penalty of £200 is automatically applied.
In general terms, one point is applied each time a submission deadline is missed. HMRC will notify you at that time.
As you might expect, you can appeal both points and penalties – see below.
The points threshold for the penalty varies depending on how frequently the individual or business is required to make submissions to HMRC.
A key point to note is that separate points tallies are recorded for VAT and Income Tax, and separate penalties could be subsequently applied.
Making Tax Digital is a UK government initiative that must be complied with. Whether you are a sole trader, partnership, self-employed individual, small business or larger business, as a business owner, you need to understand MTD. Making tax digital involves keeping digital records and submitting digital tax returns to HMRC.
Any questions? Schedule a call with one of our experts.
Whether you prefer to meet and speak over the internet, or if you prefer an in person conversation we can help you with your preference.
Stay up-to-date with the latest news affecting small businesses, get business tips and tax saving advice.