You might have heard of Making Tax Digital, or MTD, in the news recently, and for a good reason. It’s all set to transform the tax system in the UK.
This blog will cover the foundations of Making Tax Digital and what it means for you.
What Is Making Tax Digital?
Making tax digital is an initiative by the government to modernise and reform the tax system in the UK and simplify the reporting process for businesses. Starting from April 1, 2022, all Value-Added Tax-registered companies need to maintain a digital account that updates automatically and saves all relevant business data in a single place. The digital system aims to enhance transparency and eliminate the mistakes that come with manual tax filing.
The goal of HMRC is to become the most digitally advanced tax administration across the globe. Making Tax Digital is bringing about elementary changes to how the tax system operates – transforming tax administration to make it:
- More efficient
- More effective
- Simpler for taxpayers to get their taxes right.
As part of this government initiative, all companies will have access to a digital tax account. Using this account, they will provide tax details to HMRC every quarter.
How Is Making Tax Digital Changing the Tax Filing System?
Making Tax Digital aims to restructure the United Kingdom’s entire tax structure. This means businesses will need to follow a standard set of record maintenance practices and file reports every quarter. The preparations to implement this system have already started, and many businesses are now going online to improve accuracy and efficiency.
1. Digital Records
Individuals and businesses that file with HMRC need to use digital tools instead of paper forms to keep records. If you fail to maintain digital records, you will have to pay interest charges and bear heavy penalties.
At first, it was not allowed to use spreadsheets to maintain digital records. However, per the most recent announcement, you can use spreadsheets since they are integrated with an accounting application to send digital updates to HMRC.
2. Quarterly Returns
The implementation of MTD brings an end to yearly returns filing in the United Kingdom. Under this initiative, you won’t have to file an annual return. Instead, you will have to update HMRC every quarter, i.e., three months. If you’re accustomed to filing yearly returns on paper, you might have to spend a little extra time on bookkeeping.
The Timeline for Making Tax Digital
Here is the timeline for the implementation of making tax digital.
- Starting April 2017: Initiating the private pilot rollout
- From July to December 2017: Digital tax accounts reveal taxpayers an overview of their obligations in a single place, and HMRC starts a private pilot of MTD for VAT.
- From Spring 2018: Starting the live pilot for MTD VAT.
- Starting April 2019: Making Tax Digital VAT becomes mandatory for all VAT-registered organisations and businesses (including partnerships, sole traders, charities and trusts, limited companies, non—UK Businesses registered for UK VAT) that have a taxable turnover exceeding the VAT threshold. For some more complex businesses, there was a six-month deferral of the start date to October 1, 2019.
- Starting April 2022: Making Tax Digital VAT mandatory for all VAT-registered organisations and businesses.
- Starting April 2024: Making Tax Digital ITSA will become mandatory for self-employed individuals and those who get an income through property. Note that this will apply to those individuals who have a turnover from self-employment along with a gross rental income higher than £10,000.
- Starting April 2025: Making Tax Digital ITSA will become mandatory for general partnerships. This means it won’t apply to limited liability partnerships or partnerships that have corporate or other non-natural partners. This will only apply to partnerships with a turnover of £10,000.
- 2026 Onwards: Making Tax Digital for Corporation Tax is believed to be the next step in the initiative. Nevertheless, HMRC has suggested that Making Tax Digital for Corporation Tax regulations will not be implemented until 2026.
Advantages of MTD
One of the critical advantages of Making Tax Digital is that it eliminates the confusion and errors that come with manual tax filing. However, there are several more advantages of MTD than what meets the eye.
1. Hassle-Free Tax Filing
Making Tax Digital requires you to provide tax information every three months. This means you don’t need to collect a year’s worth of data at the end of each year, thereby minimising the chances of making mistakes.
2. Real-Time View of Taxes
You will get a constant real-time view of your tax obligations as they evolve. Thus, you won’t have to wait till the end of the year to figure out how much you owe, allowing you to set aside sufficient money to pay your taxes.
3. Paperless Taxes
Since companies must file their tax returns digitally, you will need software to maintain your records and update HMRC regularly. The advantage of an accounting application is that companies can identify errors as they occur rather than going through a mountain of receipts at the end of each year.
4. Access Tax-Related Information from Your Device
Thanks to the online tax process, all your details are available in a single system. This makes it easy to access your tax details anytime from anywhere you want. You can sign in through a tablet, smartphone, or laptop to access, view, and modify the data.
Last Few Words
While Making Tax Digital requires companies and businesses to adapt to new technologies and methods, a professional team of individuals can make this transition seamless. You can maintain digital financial records, file value-added tax returns directly to the HMRC, reconcile your bank statements, supervise projects, overcome compliance stress, and more. With our team on board, your business can avail all the accounting expertise required.
If you need more information about MTD, feel free to get in touch with ISA Consortium. We can even take care of the task on your behalf.
Book your free appointment with ISA Consortium
For more information and professional advice, please get in touch for a free appointment. We will discuss all the needs of you and your business, and head you in the right direction for future business .
All this and more
We offer all the above as part of our full Tax Services and Accounting and can also help you with Capital Gains Tax, Inheritance Tax, Retirement Planning, even filling out your Self-Assessment Tax Returns for you.