The Complete Making Tax Digital Guide UK
In an effort to make taxation more efficient in the United Kingdom, there is an ongoing initiative by HM Revenue and Customs (HMRC) to skip the paperwork and switch to Making Tax Digital (MTD). Since this system has become mandatory for VAT and income tax, small business owners need to know how MTD works.
Find out about how you can report your taxes and make yourself 100% MTD compliant with this comprehensive guide to Making Tax Digital for VAT and other levies.
NOTE: FreshBooks Support team members are not certified income tax or accounting professionals and cannot provide advice in these areas, outside of supporting questions about FreshBooks. If you need income tax advice please contact an accountant in your area.
What Is MTD? Basic Mechanisms and Required Filing Deadlines
Over decades, on-paper taxation has inevitably caused many avoidable mistakes! These mistakes cost the Exchequer millions of pounds a year, which has led to the push to make tax digital. Starting on the first day of April 2019, VAT-registered businesses have to keep VAT records digitally, and submit the returns to HMRC through MTD-compatible software.
The primary law for the framework of Making Tax Digital for VAT and income tax is the Finance No. 2 Act of 2017. Secondary regulations for VAT were subsequently passed in February 2018, and as of April 2019, they are now in force.
Thankfully, HMRC also understands that this is going to require transition support, so it announced that Making Tax Digital will not apply to any other taxes apart from VAT until at least April 2020.
Nevertheless, if your records aren’t voluminous or if you’re just about to start a business in the United Kingdom, it’s better to start becoming MTD compliant as soon as possible. Once April ends, MTD may become mandatory for your income tax—so it’s wise to make the change as soon as possible to avoid stress later on.
What Can I Use to Digitally File My Business’ Returns?
HMRC has an approved list of accounting software and apps that have gone through their evaluation process. These resources will help you register your VAT returns and digital records directly with HMRC, instead of having to visit the government department’s website. Some of these Making Tax Digital software are already being utilized by several businesses for other needs such as invoice templating and inventory monitoring.
FreshBooks, for example, is already being used for Making Tax Digital, as well as its real-time invoice payment collection and tax deadline reminder system. You can search for other apps that are more accessible for those who are sensory impaired and need extra support. Consider a search for a free trial of any of these approved accounting software resources, so you’ll be ready to be compliant with Making Tax Digital by April 2020.
Once you’ve organized your digital records and chosen the right software for your business, you can sign up for Making Tax Digital through the gov.uk portal.
Who Has to Start Filing Digitally?
According to the present laws, which set compliance to start on April 2019, only MTD for VAT is mandatory. But soon, other classes of taxpayers and businesses will be required to submit through MTD.
Continue reading this guide to find out which kind of taxpayer you are, and to figure out if it’s time for you to start making a change, and search for an app and other resources to start digital record keeping and tax filing.
Are Businesses Required to Submit Digital Filing?
Yes, but MTD for VAT doesn’t apply to all businesses. Many business owners who are worried about returns are asking, “Is tax digital for VAT now?” Yes, it is—if you meet the £85,000 threshold. If your business has a VAT-able turnover that exceeds this amount, you’re required to change to Making Tax Digital.
HMRC requires businesses to be VAT-registered if they exceed this threshold over a rolling 12-month period, or if they expect to exceed the threshold within the next 30 days. If you don’t know what your typical business turnover is, start examining your books or start using accounting software to monitor it.
Are Sole Traders Required to Submit Digital Filing?
There isn’t really a difference between limited companies and sole traders when it comes to the push for Making Tax Digital. What matters is your VAT registration status. If you are VAT-registered and you go over the £85,000 threshold, it’s time for you to search for a way to use Making Tax Digital. The same rules will apply to you as long as you meet these two requisites.
Do All Self-Employed Have to Go Digital?
Not yet. Unlike businesses, it’s currently not compulsory for the self-employed to submit digital records or file using Making Tax Digital. Still, since the British government is going to inevitably make it a requirement, it may be better to sign up using HMRC’s pilot scheme and get started. With the pilot scheme, you can start keeping digital tax records and send income tax updates any time, so you won’t have to file a Self Assessment for VAT returns.
Making Tax Digital’s resources are designed to help you correct any error as soon as possible and submit the correction quickly. Instead of having to search for ways to correct your self-reporting, you can do it with the support of software and the government website. Consider opting for this, even if you don’t derive income for any businesses.
Does MTD Affect Corporate Tax?
MTD may not yet be mandatory for corporate tax, but HMRC will introduce measures in April 2020, which can affect a business’ bottom line and accounting system.
Can I Use Spreadsheets for MTD?
Yes, but if you use spreadsheets, your spreadsheets program should be able to submit your data to the MTD site. If you’re planning to file tax digital, MTD lets businesses manually copy and paste their digital records. This can take up a lot of time, so consider conserving your resources instead. You should also consider a search of HMRC’s guide to approved software so you can directly upload your records from the app itself.
Note that HMRC will not provide taxpayers with a program, just a list of choices they can search through and use on their own.
What Happens If I Don’t Comply with MTD?
HMRC has cautioned that there will be penalties for taxpayers if they do not comply with the requirements. While they’ll take a soft-touch approach for the first year of non-compliance, subsequent defaults will result in a fine.
HMRC can charge up to 100% of any understated or overclaimed tax if you send a VAT return with a careless or deliberate mistake. You can also be charged a fine of £400 if you submit a paper VAT return without an exemption for online filing from HMRC.
These penalties can really add up with every year that you don’t follow the rules for online returns, which can make a major dent in your business income. Leniency has been promised to businesses who do their best to comply, but it’s not worth it to wait for HMRC to decide if you’ve made sufficient efforts to do so. It’s advisable to just switch to MTD as soon as you can to reduce or avoid penalties.
Get Ahead of the Curve and Be MTD Ready
Whether you handle several VAT-registered businesses or you’re a self-employed freelancer, the future is clearly geared towards a full Making Tax Digital system in the UK.
Accountants can be a large expense from your monthly budget—thankfully it’s possible to do it all yourself! With an app to help you manage your tax filing in time for legal compliance, you can help your business save money and do everything yourself with just a few taps on your phone.
Find out more about which software you should use by testing a handful of free trials. Apart from assisting with MTD, these apps are also capable of organizing payments, tracking billables and helping you manage your cash flow.