Posted on: 31/01/2020 by: David Morgan in: Accounting, Tax
Making Tax Digital (MTD) is the government’s initiative to modernise and simplify tax administration for everyone, by moving the whole process online. This pioneering venture promises to make tax submissions more effective, more efficient and easier for taxpayers. However, with recent research suggesting that 30% of businesses are unaware of what this means for them we’ve written a to clarify the situation.
Let’s first understand why MTD is being introduced. Figures reveal that mistakes made when submitting tax returns costs the Exchequer more than £9 billion per year but the software used for MTD will reduce the number of errors, increase accuracy and therefore save the Government vast sums of money in tax. Additionally, HMRC want to be a world leader in the field of digital taxation administration.
MTD for VAT started in April 2019 so any VAT registered business with a taxable turnover above the VAT threshold must take advantage of the Government’s MTD service to keep digital records and download the compatible software to submit VAT returns. This includes sole traders, partnerships, trusts, charities and limited companies with a turnover in excess of £85,000. Business that qualify and who fail to comply with MTD may incur a penalty. HMRC has stated that Corporation Tax won’t be affected by MTD until 2021.
The Government is focussing on helping the transition for businesses to MTD as seamless as possible and an income tax pilot scheme is currently being run by HMRC. They are encouraging self-employed business owners to download the relevant software and sign up to their secure service to keep digital records and submit Income Tax updates. There are several companies providing compatible accounting software and you can use it on a subscription basis with bespoke packages to meet the size of each business.
Many business owners may be pleased to know that the introduction of MTD means the end of the annual tax return. However, businesses will have to submit the relevant financial data through their digital tax account instead, and this must be done at least every quarter. This will give businesses an indication of how much tax is owed on an ongoing basis rather than finding out at the end of the year.
Small businesses should benefit from MTD by becoming more efficient through eliminating the need for any paperwork. The new process means they will be able to keep track of their income and outgoings in real time and more efficiently enabling them to make more accurate and timely business decisions.
Although HMRC haven’t given any specific dates, MTD will be rolled out to all other types of business owners in the near future.
For more information about how MTD will affect your business and for compatible accounting software, click here.