HMRC introduced its Making Tax Digital (MTD) initiative with the aim of eventually eradicating all paper requirements from tax legislation. The first phase of MTD came into effect in April 2019, with the requirement for VAT-registered businesses with an income above the current VAT threshold (£85,000 for 2021/22 tax year) to submit their VAT returns online using ‘functional compatible software’. The next phase in the MTD timeline, as outlined by QuickBooks, looms large, with all VAT-registered businesses required to use MTD for their VAT accounting by April 2022.
In this article, we’ll discuss the steps that businesses must take to meet this impending deadline and look towards the other MTD deadlines that small businesses and the self-employed should be aware of.
Prepping for MTD Made Easy
So, what steps should you take to make sure that your business is ready when the next phase of Making Tax Digital comes in?
Find out if MTD for VAT applies to you
If your UK business is VAT-registered but your income falls below the £85,000 VAT threshold, then you will need to follow the MTD for VAT rules for the first full VAT period that falls after the April 2022 deadline, as well as subsequent VAT periods. This will apply to some 700,000 UK businesses that are registered for VAT but are not already following the MTD for VAT rules.
An exemption from MTD for VAT can be sought if it is not reasonable or practical for a business to use computers, software and the internet to follow the rules. That may be due to an individual’s age, a disability, a remote location or an objection on religious grounds. A simple preference not to comply is not a valid reason.
Work out whether your current systems are compatible
If you already use accounting software to keep your small business’s finances in check, then the good news is that the switch to MTD should be quite simple. It could be as easy as signing up for Making Tax Digital on the HMRC website, which takes no more than a few minutes, and activating the MTD feature on your software.
If you use older, non-compatible software, then you can either upgrade to compatible software or get MTD bridging software, which will link your records to HMRC’s systems in an MTD-compliant manner. You can use this list to find MTD-compatible software packages and bridging software that can connect your non-compliant software to HMRC’s systems.
If you’re still using a spreadsheet for your VAT records, then it may also be possible to use MTD-compatible bridging software to link it to HMRC’s systems. However, you may find that it’s easier to invest in MTD-compliant software to do this for you. The government estimates the cost of this to be around £70 a year.
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Think about the processes you may need to update
To comply with MTD for VAT, some of the current processes you use to generate your VAT returns may need updating. For example, you can still create paper-based notes or invoices, but that data will need to be transferred to your MTD-compatible software.
Equally, from April 2022, it will no longer be enough to simply update your accounting software with the total value of your invoices for each month. Instead, for each sale your digital records must also include:
- The time of the sale
- The value of the sale (net excluding VAT)
- The rate of VAT charged
If you use the services of a small business accountant, then it’s well worth speaking to them about which of your processes, if any, will need updating.
Be aware of other upcoming deadlines
The other Making Tax Digital deadline that small business owners and the self-employed need to be aware of is the requirement for self assessment taxpayers to comply with MTD for Income Tax by April 2024. It will require sole traders and landlords with a personal income of above £10,000 to use compatible software for their income tax accounting.
From April 2024, there will no longer be any need to file a self assessment tax return. Instead, individuals will have to submit updates on at least a quarterly basis along with an end-of-period statement. There will also be the requirement to submit a single final declaration for all of their income at the end of each year.
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Take the necessary steps now
Using software that is compatible with HMRC’s Making Tax Digital for VAT and Income Tax will make the process much easier. Doing this before April 2022 will help you avoid any unexpected bumps in the road and the penalties that could subsequently arise.
Cloud accounting software packages, such as QuickBooks, Scoro and Xero, communicate with HMRC’s computers automatically and help you make a seamless transition to MTD. If you’re using desktop accounting software, then you may need to update it for MTD if you haven’t done so already. Again, this is something you should do sooner rather than later.
Dealing with business tax compliance can be a challenge, but while the changes may be a burden in the short-term, in the longer-term, MTD will help you stay on the right side of HMRC and give you better visibility of your business’s finances. However, it is worth making the changes as soon as possible to avoid any undue stress.