Making Tax Digital (MTD) is HMRC’s initiative to encourage businesses to keep their accounts up to date and digitally.
Up to date accounts can help owners to run their business more efficiently and to spot potential problems in the early stages. Holding these records digitally will enable the bookkeeper to make use of modern technology to record the details with the minimum of fuss. The aim is to create useful management information quickly and easily.
MTD for VAT
The first phase, MTD for VAT, went live 1 April 2019 for most VAT registered businesses. These businesses now have to keep digital records and submit their summary VAT returns directly to HMRC from their own accounting software or using bridging software from a suitable spreadsheet. Our Business Toolkit is already set up to take care of this for most businesses and you can find detailed requirements on MTD for VAT on HMRC’s overview of Making Tax Digital.
As with any change, this was not popular with busy business owners and those who generally struggled with technology and tracking their business. However, once things are settled in, you will start to reap the benefits of moving onto accounting software with numbers at your fingertips. For those already using software to submit their VAT returns, phase one of MTD was a bit of a non-event. The impact was felt most by the smallest businesses who were handling their VAT returns manually or on spreadsheets.
MTD for Income Tax
Phase two will be MTD for Income Tax and this is expected to go live 1 April 2023 at the earliest. At this point little is known of the details but the annual tax return will be replaced by four quarterly submissions plus a final adjustment submission.
However, if your accountant typically makes lots of adjustments at the year end it may be that some of these bigger tweaks need to be done in each quarterly return. For instance, if you’re recording your invoices mainly for VAT and credit control purposes, you may not usually adjust your stock or depreciation and capital allowance figures until the year end. This will mean additional work for you and your accountant.
At the moment this quarterly reporting will be required for any business or landlord with a turnover (not profit) of about £10,000 per year. This means that many buy-to-let landlords will find themselves having to submit 4-5 sets of figures each year. This will result in a great deal of additional work for many individuals.
Digital Tax Accounts
HMRC have set up digital tax accounts for each individual and business. These allow the taxpayer to see, in real time,* the updated records that HMRC hold for most taxes. It’s also possible to make changes to some of those records online instead of having to write or hang on the telephone for an individual at HMRC to deal with the change.
What happens next?
As we learn more of HMRC’s requirements for the second phase of MTD we will keep you informed and update our business tools to help you.
*Although this is referred to as real time, many records are only updated at certain times during the month or after a few days delay.