Making Tax Digital: What UK Businesses Need to Know

Making Tax Digital (MTD) is a UK government initiative that is transforming the way businesses and individuals manage their taxes. The aim is to make the tax system more efficient, reduce errors, and simplify the process of submitting tax returns. By moving tax reporting online, MTD ensures businesses keep better records and use digital tools for tax submissions, making it easier for everyone involved.

As MTD is becoming compulsory for more people, it’s important to understand how it works and how it might affect you. This article will guide you through the key aspects of MTD, its requirements, and the steps you need to take to ensure compliance.

In this article, we look at: 

• What is Making Tax Digital? 
• Is MTD Compulsory?
• When is MTD Compulsory?
• MTD Timeline
• Tools for MTD Compliance
• How to Register for MTD
• Preparing for MTD

What is Making Tax Digital (MTD)?

Making Tax Digital (MTD) is a UK government initiative designed to simplify tax management for businesses and individuals by making the tax system digital. The goal of MTD is to improve accuracy, reduce errors, and make it easier for businesses to manage their tax affairs.

To comply with MTD, individuals and businesses must keep electronic records of their tax-related transactions and use digital tools to submit tax returns to HMRC.

Is MTD Compulsory?

Yes, MTD is mandatory for most businesses, individuals, and organizations in the UK.

From the UK government website:

"Businesses need to have signed up to Making Tax Digital for their first VAT return starting on or after 1 April 2022. They may not be required to make their first submission via Making Tax Digital until Summer 2022."

Failure to comply with MTD regulations will result in penalties and fines.

When is MTD Compulsory?

MTD is being rolled out in phases, with the first phase starting in April 2019 for VAT returns. The key milestones are as follows:

VAT:

• April 2019: VAT-registered businesses with turnover above £85,000 must retain digital records and submit VAT returns using MTD-compliant software.
• April 2021: “Digital links” for data transfer between software must be established.
• April 2022: All VAT-registered businesses (including those below the threshold) must submit VAT returns using digital software.

Income Tax:

• April 2024: Self-employed businesses and landlords with turnover above £10,000 must report under MTD for Income Tax.
• April 2025: General partnerships will be required to join MTD for Income Tax.
• Date TBC: Other types of partnerships will need to join MTD.

Corporation Tax:

• April 2024: Companies can begin using the MTD for Corporation Tax pilot program.

MTD Timeline

Here's a summary of the key dates for MTD:

Tools for MTD Compliance

MTD requires businesses to use “functional compatible software” to manage tax affairs. Below are the tools that can facilitate compliance:

1. Spreadsheet Software

   • Microsoft Excel or Google Sheets: These can help record and manage your tax-related transactions. Google Sheets is free; Excel requires a paid license.

2. Accounting Software

   • Xero, QuickBooks, or Sage: These accounting tools assist with recording and managing tax-related transactions, and preparing/submitting tax returns to HMRC.

3. MTD-Compliant Bridging Software

   • This software allows data to be transferred from your existing accounting system to HMRC’s system.

4. HMRC’s Own MTD-Compliant Software

   • HMRC provides its own tools for recording and submitting tax-related information directly.

Important Note:

Ensure the software you use is MTD-compliant, meaning it works with HMRC’s systems and can submit tax information in the required format. For more details on compliant software, visit the gov.uk website.

How to Register for MTD

To register for MTD, you must have a Government Gateway account and be registered for VAT.

Steps to Register:

1. Already have a Government Gateway account?

   • Log in and select “Sign up for Making Tax Digital for VAT” to register.

2. No Government Gateway account?

   • Create an account by visiting the Government Gateway website and following the registration instructions.

3. Not VAT-registered?

   • If you’re not VAT-registered, you must first register for VAT through the HMRC website.

Once registered for VAT, you can complete the MTD registration process.

Preparing for MTD

The MTD initiative will be extended to include Income Tax starting April 2024. This will require businesses and landlords to submit income tax information quarterly, in addition to traditional self-assessment.

To prepare:

1. Review Record-Keeping Systems: Ensure your systems can handle quarterly income tax filings.
2. Choose Suitable Software: Select MTD-compliant software to manage your records and submit returns.
3. Seek Professional Advice: Consider consulting an accountant to ensure a smooth transition and avoid penalties.

MTD is gradually being phased in, and not all businesses or individuals will need to comply immediately. However, it’s important to stay informed about your specific requirements and deadlines.

Need Help with MTD?

If you're unsure about how to comply with Making Tax Digital or need assistance with the transition, our accounting firm is here to help. We specialize in helping businesses navigate MTD requirements and ensure smooth and timely submissions. Get in touch today to make sure you're fully prepared and avoid penalties!