The government is currently in the process of rolling out Making Tax Digital to all aspects of taxes, from VAT to income tax. The aim of this scheme is to bring all taxes online, making the process of submitting your tax return and paying your tax return streamlined and simple. But what is Making Tax Digital and how will it affect you and your business?
In this article, we’ll tell you everything you need to know about Making Tax Digital, from who it will impact to when it will be rolled out.
What is Making Tax Digital for business?
Making Tax Digital (MTD) is a new digital tax system being introduced in the UK by the government. It will see all business taxes in the UK moved online, meaning that companies with a taxable turnover of more than £10,000 per year will be required to use online accounting software which is compatible with Making Tax Digital.
This means that you will no longer be able to complete paper tax returns – everything will be done digitally through your accounting software and the HMRC website. You’ll also need to maintain your financial records online, so that your tax returns can be automatically generated and submitted to HMRC when required.
But who does Making Tax Digital impact, and how will it work in practice? Read on to find out.
Why has Making Tax Digital been introduced?
Making Tax Digital has been introduced in order to make tax filing simpler for businesses, and also to make tax filing more efficient. The government has stated that Making Tax Digital will help businesses to manage their finances better and reduce the need to file paper returns. It will also cut red tape and reduce the number of errors when filing returns.
How will digital tax work?
The government has outlined three key stages in the Making Tax Digital scheme: VAT, income tax and corporation tax. Let’s take a look at each of these stages, as well as exploring when each stage is expected to come into force.
The first stage was to roll out MTD to all VAT-registered businesses. This stage began in 2019, when all businesses that had an average turnover which was above the VAT registration threshold became legally required to store their financial records online and file their VAT returns using online accounting software.
In April 2022, all VAT-registered businesses will have to move to this online model, whether or not their average turnover is above the VAT threshold.
Digital Income Tax
The next stage of MTD is to roll out the program for income tax. This stage was recently pushed back to April 2024, as a result of the Covid-19 pandemic, in order to give businesses more time to prepare for the upcoming changes.
This part of Making Tax Digital will apply to all individuals, partnerships and companies that have a total gross income or turnover of at least £10,000. This stage will mean that these businesses are required to keep their records online, and to file their tax returns digitally.
Digital Corporation Tax
The final stage of Making Tax Digital will be to move corporation tax to a digital model. This stage is still in the consultation stages, and the government have stated that businesses will not be under any obligation to file their corporate tax online until at least April 2026.
It is expected that businesses will soon begin to be invited to a pilot scheme for making corporate tax digital, once key decisions have been made by the government and HMRC.
Who is affected by Making Tax Digital?
Making Tax Digital will eventually impact every business owner, whether you are the director of a multi-national corporation or a sole trader working on a self employed basis. However, the roll out of MTD is being done slowly and gradually, to allow business owners the time to get used to the changes and adapt their business accordingly.
If you outsource your accounts to an accountant, now is a great time to check with your accountant that the software they use is compatible with Making Tax Digital, and that there is nothing you need to do to prepare for the upcoming changes.
If you complete your accounts in house, it’s important that you keep up to date with the changes, so that you know when you’ll need to start completing your taxes digitally.
Pros and cons of Making Tax Digital
As with anything, there are both pros and cons of the Making Tax Digital scheme. However, since this is a government scheme that will be compulsory for all business owners, it is important that you comply with the changes.
So, what are the pros and cons of the digitalisation of business taxes? Let’s take a look.
What are the benefits of Making Tax Digital?
Whilst the introduction of Making Tax Digital may feel like one giant headache to begin with, there are actually many benefits for businesses to taking your taxes online. It might not feel like it at first, but hopefully the implementation of this new scheme will make your life easier by simplifying the process of filing your taxes and reducing the chances of mistakes being made.
Firstly, switching over to software that is compliant with MTD will mean that you have less paperwork to worry about. You won’t need to sort through a whole pile of papers every year when it comes to filing your taxes as it will already be online.
There’s no hiding from the fact that completing your tax return is complicated. This means that it’s currently easy to make a mistake when you’re filing your tax return, which could result in a costly fine from HMRC. Switching to MTD compliant software will virtually eliminate the potential for mistakes to be made, meaning that you’ll save time in completing your tax return and you won’t have any sleepless nights worrying about whether you’ve completed your tax return correctly.
This simplified process means that you’ll have more time to focus on what’s really important to your business. Whether that’s developing new products, spending more time building relationships with your most valued customers or working on your marketing, you’ll be spending less time on your accounting and more time on growing your business.
Finally, making the switch to MTD compliant software will enable you to see your business’ performance in real time. You won’t need to wait until you file your tax return to find out how much you owe, as you’ll be able to view it throughout the year, in real time. You’ll also be able to keep track of your incomings and outgoings more easily, enabling you to make your business more efficient and profitable than ever before.
What are the disadvantages of Making Tax Digital?
Whilst there are many benefits to the new Making Tax Digital scheme, it’s important to be aware that there also some drawbacks. These disadvantages mostly apply to businesses that do not already maintain their accounts online, so may be less prepared for the switch to digital taxes.
The biggest problem with Making Tax Digital is that it will require all business owners to update their financial software in order to comply with the changes. This means that you’ll need to be using accounting software which is compatible with Making Tax Digital. It isn’t necessary to use online accounting software if you complete a paper tax return, but this will no longer be an option when MTD is rolled out, which could cause a problem for business owners who are not familiar with this type of software.
You’ll need to ensure that the accounting software that you choose is compatible with Making Tax Digital. Fortunately, most major accounting software is already compatible, so there shouldn’t be too many problems there, but it’s worth being aware of. MTD compatible software include Xero, Sage and QuickBooks, amongst many others.
The business owners that will be impacted the most by Making Tax Digital are those who are not computer literate. If you don’t already use a computer for your accounting or do not own a computer, you may find the introduction of MTD more challenging for your business. For these business owners, they will be forced to make the choice between investing in digital software and learning how to use it, or outsourcing their accounts to a qualified accountant.
Does Making Tax Digital apply to sole traders?
If you’re trading as a sole trader, you might be wondering whether your business falls under the scope of the Making Tax Digital scheme, or whether it only applies to limited companies.
The Making Tax Digital scheme will eventually apply to all businesses with a turnover of more than £10,000, including sole traders. This is because the second phase of MTD is to make all income tax digital, including self-assessment tax returns.
So, if you’re trading as a sole trader, you should be prepared for your income tax to move fully online in April 2024. This will mean that you’ll need to use online accounting software which is compatible with Making Tax Digital, or outsource your accounting to a qualified accountant who can file digital tax returns on your behalf.
If you are a sole trader with a turnover that exceeds the VAT threshold, you should already be completing your VAT returns online. This is because the Making Tax Digital VAT scheme began in 2019.
Can you opt out of Making Tax Digital?
If you prefer keeping your financial records on paper, you might be wondering whether there is a way to opt out of Making Tax Digital, so that you can continue filing your tax returns by post.
Unfortunately Making Tax Digital is a universal scheme that will eventually cover all businesses in the UK with a turnover above £10,000. So, unless you are a sole trader with a gross turnover below £10,000, there is no way to opt out of Making Tax Digital – you will eventually have to move over to this scheme when the time comes.
If keeping your accounts digitally isn’t for you, it’s worth considering outsourcing your business accounts to a qualified accountant. They will be able to submit your digital tax returns on your behalf, meaning that you won’t need to deal with the digital side of accounting.
Can I use Excel for Making Tax Digital?
Many business owners choose to manage their business’ accounts using spreadsheet software, Microsoft Excel. So, it’s only natural that these business owners are wondering whether Excel is compatible with Making Tax Digital, or whether they will need to invest in new software in preparation for the transition.
Whilst Microsoft Excel in itself is not compatible with Making Tax Digital, there are add-ons that you can install to enable you to file your digital tax returns through Excel. For example, the Avalara extension ‘MTD Filer’ is one example of a free add-on that you can install to enable you to use Excel to file your online tax returns.
Is Making Tax Digital just for VAT?
At this current point in time, Making Tax Digital only applies to VAT returns. However, HMRC has plans in the near future to roll out MTD to income tax and corporate tax, to create one of the world’s most sophisticated tax systems.
The aim of this scheme is to reduce the possibility of human error and make tax returns quicker and easier to complete for business owners. It’s important that business owners ensure that they stay up to date with the latest developments in the MTD scheme to ensure that your business doesn’t get left behind, and that you don’t become liable for any penalties from HMRC for missing your tax return deadline.
What does Making Tax Digital mean for accountants?
If you’re an accountant, you might be wondering how Making Tax Digital will impact you, and how you might need to adapt your business in preparation for this scheme being rolled out. After all, it isn’t just business owners that these changes impact.
The only potential change that accountants may need to make is to ensure that their accounting software is compatible with MTD. Luckily, the majority of major accounting software brands are already compatible, including Xero, Sage and QuickBooks. This means that the chances are your software will already be compatible and you will not need to make any changes to how you work.
Can I file my VAT returns online if I’m not Making Tax Digital?
At the moment, you can still submit paper VAT returns if your business is not required to make digital tax returns. However, from April 2022 onwards it will no longer be possible to file a quarterly VAT return by post. This means that every business that is registered for VAT will need to complete their VAT returns online and use compatible accounting software. However, you are able to register for Making Tax Digital for VAT early if you choose to, allowing you to get ahead of the game and learn how to manage your taxes online before you are forced to do so.
Do my accounts need to be digital?
Making Tax Digital is currently being rolled out to all UK businesses. This means that when it’s your turn to turn digital, you will be required to use compatible digital accounting software to keep your financial records and to file your tax returns. So, whilst you might not yet need to keep your accounts digitally, you will need to move your accounts online in the near future. We’d advise looking into MTD compatible digital accounting software sooner rather than later, to avoid any last minute rushes when MTD is introduced. This will also allow you to get to grips with your accounting software before the time comes to complete your digital tax return using the software.
The government is slowly rolling out its Making Tax Digital scheme, which will see all UK businesses moving their accounting online and submitting digital tax returns. Whilst the scheme is not likely to be fully rolled out for at least another four years, it’s almost certain that it will be coming your way in the near future.
The best way to be prepared for Making Tax Digital is to ensure that you keep up to date with the latest developments, and begin looking at different types of digital accounting software if you currently keep your accounts on paper. Remember – preparation is key, so start researching now. Your business will thank you for it!
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