It may be later than we initially expected, but it’s coming and to all intent and purpose, it is just around the corner. It builds on Government's 10 year strategy to make the tax system more resilient and effective. Its intention is to boost business productivity and support taxpayers.
What is it?
From April 2022 MTD it will be mandatory for all VAT registered businesses, thus scooping up all of those who were not required to comply in the last round.
From April 2023 all sole traders, partnerships and landlords with a turnover above £10,000 will be required to keep their records digitally and file quarterly returns to HMRC with details of their income and expenditure. Companies and Limited Liability Partnerships will be required to maintain records digitally at a later date.
HMRC believe it will provide the following benefits:
· The end of the annual tax return for millions.
· Creation of a personalised ‘real-time’ digital tax account.
· Tax ‘right first time’ avoid errors and compliance checks.
HMRC ran a consultation from November 2020 to March 2021 on the future of MTD for businesses paying corporation tax. It looks as if it will become a reality but HMRC will not mandate its use before 2026.
Making Tax Digital has been running for VAT registered businesses with a turnover over £85,000 since April 2019. It sounded very scary and complicated, but has actually been OK, with the software doing all the work. Many smaller businesses who were not required to sign up to MTD voluntarily registered, this was around a a quarter of all VAT registered businesses who were below the threshold.
Making Tax Digital has been designed to make sure records are kept in real-time. With a cashless society in the offing, EVERY transaction a person makes will be traceable.
We rely more and more on our phones, the software providers have responded to this and some businesses can be run purely on a mobile device, something we could have never thought possible.
It is HMRC's ambition to become one of the most digitally advanced tax administrations in the world and we are racing towards the finishing line.
But I don’t have to though, do I?
Yes you do, unless you have an exemption. MTD will mean every sole trader, business or landlord earning over £10k per year MUST be compliant. The £10,000 threshold applies to each person, and not each business, so if you have sole trader income of £8,000 and rental income of £3,000 your combined turnover is over £10,000 and you will be required to enrol for MTD.
It doesn’t matter if you have a retail shop, provide tuition, do nail art or bake cakes – this will apply to you.
I just pay my taxes once a year, what’s the big deal?
Tax payments will not change and will still be 31st January after the end of the tax year as they currently are.
That is so unfair, why are they doing this?
If you are employed, your payroll information is reported into HMRC monthly, this has been happening since April 2012. It didn’t really affect anyone, all employees were paying their taxes monthly anyway, it was better for the employee to do this as any code changes happened almost immediately. MTD is applying the same model to the self-employed, sole traders and partnerships, it just brings everything into line.
What do I need to do?
There are several accounting software packages that make it easy to manage your accounts, and once you convert you could be left wondering why you did not move to digital record keeping years ago. Using accounting software can be easier and quicker than maintaining records in a book or on multiple spreadsheets in excel and allows much greater visibility of cash flows and profit levels.
HMRC have a list of suggested software on their website, at a range of fees. You may have friends or colleagues that recommend certain accounting packages, but please check that they will be MTD compliant. This is especially important if they are free.
It is worth spending time researching and trying out the different software as you need to find the one that works for you. The idea is to automate your accounting records as much as possible so you do as little as possible.
Your tax advisors and accountants have been championing digital records and compliant software for a few years now. So, get yourself onto a recognised platform and make this a conscious choice rather than a last-minute panic.
By moving to digital record keeping as early as possible you will have plenty of time to refine your business processes. The eventual move to quarterly reporting should then be stress-free and involve a press of a button.
If you need any assistance with choosing a package which is right for your business, give us a call – Create Balance Chartered Accountants and Business Partners
– 01892 311890 or email us at firstname.lastname@example.org. We can undertake a low cost full business review to ensure you have the right tools at your disposal.