You’ve probably heard of the Government scheme called Making Tax Digital. But what does it actually mean, and how will it affect your business?
The first thing to realise is that there is nothing to be scared about — you won’t need to rush out and buy the latest tech to be compliant. And if you do get something wrong, it’s unlikely that HM Treasury will be knocking on your door.
“Business owners need to understand that making their accounting systems digital can actually save them time and money,” says Joanne Colman from One Click Accountant.
“I’m sure everyone would like to spend less time dealing with invoices and tax returns. With real-time accounting and more frequent filing periods, you can gain more control of your finances without the worry of receiving a hefty tax bill at the end of the year.”
What is Making Tax Digital?
The Making Tax Digital (MTD) scheme is a cornerstone of the Government’s plans to create an easier way for individuals and businesses to stay on top of their tax affairs.
The Treasury has an ambitious goal to become one of the world’s most digitally advanced tax administrations. In order to achieve this, major changes are being made to the tax system works so that it is more effective, more efficient and is easier for taxpayers to get their tax right.
For more details, click here to visit the Government website.
Who Does it Affect?
Whether you are a landlord, self-employed or run a large company, Making Tax Digital is relevant to all businesses.
Since April 2019, MTD has been in place for businesses over the VAT turnover threshold of £85,000, who have to file their VAT returns directly from their bookkeeping software. According to official figures, around two million UK taxpayers who do, use any professional help when dealing with HMRC.
These people will need to choose a digital system.
“As from April 2023, Self Assessments are due to be replaced by five new reporting obligations made during and after the tax year”Joanne Colman, One Click Accountant
“Essentially, you will need to file with HMRC every three months, which will require you to use some form of accounting software,” continues Joanne.
To help you find the right software, click here to read the Government’s guidance.
“The good news is that you can delegate all your bookkeeping and tax filing to an accountant who will be up to speed with the new system,” Joanne suggests.
What About Income Tax?
“There will be five tax returns per year,” explains Joanne. “The first one is likely to be 2021/22 which runs from April 6, 2021 to April 5, 2022, however, no official dates have been released by HMRC.
“If you calculate your income and expenses on a cash basis, the entry threshold will increase to £150,000 and the exit threshold to £300,000.
“The current general disallowance of capital expenditure is set to make way for a more specific disallowance for certain assets. Some details are still unclear, so expect more announcements over the coming months.”
Are There Exemptions?
There is a digital exclusion opt-out for those who feel they are unable to adapt to the new regime due to age, disability or location, or if it is contrary to your religion.
However, you must satisfy HMRC to qualify for any exemption.
Will There be Penalties?
“Don’t sweat. There will be no immediate late-filing penalties, at least for the first 12 months while the new system gets under way.”
“Once things have settled down, you will be penalised for filing late or for any errors in your documents,” warns Joanne. “You may also incur late-payment interest.”
“There are some simple steps that every sole trader or business can make before MTD becomes a reality,” concludes Joanne. “If you make the adjustment in good time, there will be no issues, and you should find that your finance process will run smoother.”
To ensure that you are Making Tax Digital compliant