Making Tax Digital (MTD) is set to bring about the biggest change to the UK’s tax system for a generation – but how much do you know about it? Here’s a brief introduction to the facts about MTD and how the new era of digital tax will impact your business.
The end of the tax return
Upgrading the UK’s tax system to make it fit for the digital age is at the heart of the government’s plans. This means online tax submissions will become the only option for majority of self-employed taxpayers and paper tax returns are likely to become a thing of the past.
The biggest change will be the introduction of a continuous system of reporting your business’s financial information to HMRC, which will replace the current annual Self-Assessment tax return. Although HMRC is keen to use the term ‘real time’ to describe the new process of continuous reporting, the reality is that you’ll be required to submit your financial figures through some form of tax software at least four times a year. The press have been quick to label this process ‘quarterly tax returns’ but this is a little misleading. FreeAgent has produced a guide to clear up the confusion over quarterly tax returns as well as a few other common misconceptions about the initiative.
MTD is already under way!
Although MTD was taken out of the Finance Bill in April, the timeline for implementation hasn’t been affected. The pilot scheme is well under way, with tech companies such as FreeAgent working closely with HMRC to test how people will respond to digital record keeping. As it stands, MTD looks set to begin as soon as April 2018 for businesses with annual sales over the VAT threshold of £85,000.
In 2019 MTD will kick in for sole traders with annual sales between the minimum MTD threshold of £10,000 and the VAT threshold.
Your digital tax account
You may have noticed that you already have access to a digital tax account with HMRC. This will be at the centre of the forthcoming changes. Through your digital tax account you will:
- see a complete picture of your business’s tax affairs
- manage all your tax liabilities in the same place, at the same time
- submit your financial information to HMRC in “as close to real time as possible”, preventing any overdue tax or repayments owed to you from building up
- have clarity about how much tax you owe, avoiding any surprise tax bills at the end of the year
Exemptions from Making Tax Digital
HMRC has already confirmed that the “digitally excluded” and charities will be exempt from MTD. The digitally excluded are defined as those who cannot engage with digital accounting software for reasons of:
- remoteness of location
- “any other reason”
The details of any further exemptions from MTD are still rather vague and it’s likely that HMRC will look to provide further guidance on these before the rollout.
Getting your business ready for the new era of digital tax
If MTD applies to you, you’ll have to use digital tools to keep records of your income and costs. If you use spreadsheets to manage your accounts at the moment and don’t want to switch to accounting software, you’ll also have to make sure that they meet MTD’s technical requirements. This will most likely involve combining your spreadsheets with software in some way.
Although Making Tax Digital will be a big shift in the way many of the UK’s self-employed people manage their finances, there will also be a lot benefits, including:
- always knowing where you stand when it comes to tax
- having access to your business’s tax information online in a single place
- being able to plan and budget more effectively
Download FreeAgent’s free guide to Making Tax Digital to find out more about how the changes will impact you.