Making Tax Digital: The State of Affairs & What You Can Do

In an effort to facilitate a more effective and simple tax administration process, the HMRC has taken steps that will revolutionise the UK tax system with the introduction of Making Tax Digital (MTD). This initiative will facilitate online tax filing and payment procedures, alongside digital record keeping.

This HMRC initiative will bring an end to self-assessment through bringing a fully digitalised tax system to the UK by 2020. It is important to know exactly what Making Tax Digital will mean to you, as the changes will affect a wide range of taxpayers. The majority of self-employed professionals, business and landlords will be affected by this new initiative. Keep reading to discover what exactly this means to you as a taxpayer. 

What is Making Tax Digital?

After its original announcement in 2015, Making Tax Digital has now begun to take effect for certain individuals in regards to their tax and will become more influential as time rolls on. The primary function of this system is to streamline the tax administration process for everyone involved. It will require online tax filing, payment and a digital record-keeping system for certain taxpayers. 

The previous process of “self-assessment” which was used to collect Income Tax will become obsolete with this more efficient model. Many VAT-registered businesses who operate under a taxable turnover which is above the VAT threshold will also be required to use the Making Tax Digital service.

Business owners and self-employed individuals will now be able to maintain digital records of their income using compatible software. This system will allow Brits to keep digital records of their income and use digital software to submit VAT returns.

What is a Digital Tax Account and Digital Record-Keeping?

Tax returns are being simply replaced by digital tax accounts by HMRC. This will affect millions of individuals and business organisations all over the UK through serving as digitised personal tax accounts. 

All of a taxpayer or business’s details will be brought into one place with a digital tax account. In a similar way to an online bank account, this service will allow the user to view the current state of affairs surrounding their taxes, register for services, update information and alter payment details. You will also be able to see the breakdown of how exactly your tax has been calculated. 

Digital tax accounts allow for both Personal Tax Accounts and Business Tax Accounts. Individuals with income taxed under PAYE who receive rental income or are self-employed, receiving a total income under £10,000 from this, will not have to complete a tax return. 

Any business who is obliged to file quarterly will be obliged to keep digital records. Only VAT-registered businesses with a turnover over the threshold will have to do this. However, any other businesses who want to take part in digital record keeping in order to have a better understanding of their own accounts have the choice to do this as well. 

The majority of businesses will have needed to keep digital records and submit VAT returns using software following on from April 2019. These digital records will need to include:

  • The value of supply
  • The time of supply
  • The rate of VAT charged
  • The business name and address
  • The business VAT number
  • Any further details of VAT accounting schemes you use 

What Dates Do I Need to Know?

When it comes to the introduction of Making Tax Digital, it can seem overwhelming and confusing when certain aspects will be introduced. This is because HMRC has opted for a staggered approach which introduces regulations surrounding the new digitalised tax system over time to aid in a seamless transition for the British taxpayer. 

In an attempt to streamline the tax administration process, HMRC introduced the personal tax account in 2015. Moving past this date, HMRC have been gradually introducing more aspects of Making Tax Digital. 

Since April 2019, VAT-registered businesses with a taxable turnover above the VAT threshold of £85,000 are now obliged to keep digital records and submit digital VAT returns using compatible software. Businesses earning below the threshold also have the option to do so as well. 

The next step in the Making Tax Digital timeline was originally planned for 2018, however, it has since been pushed back. 

From April 2021, quarterly reporting for income and corporation tax will become mandatory for all businesses, self-employed individuals and landlords who have a turnover over the VAT threshold of £85,000. 

It will also then become optional for businesses, self-employed individuals and landlords who earn below this threshold, if they wish to have a better understanding of their tax payments or simply get better attuned with the process. 

In terms of VAT, though, the key thing to bear in mind is that you will be obliged to comply with the Making Tax Digital initiative from the first day of your first VAT period, which will be 1 April 2019 or later. You will not be able to manually complete a paper-based VAT return after this or even manually fill in a VAT return online on the HMRC VAT portal.

Making a Smooth Transition to Making Tax Digital

Whilst the Making Tax Digital initiative has been put in place to facilitate a more effective, efficient and simple tax filing system, some individuals and businesses may be concerned about making a smooth transition over to the new system. 

It is vital when making this transition that no documents or information is lost along the way, which could be vital to your personal livelihood or business operations, as well as being required by HMRC. The steps which you need to follow to ensure you are obeying HMRC regulations and guarantee a smooth transition to Making Tax Digital are as follows:

  1. Work out whether your business is affected (e.g. is your business VAT-registered and above the threshold, or expected to grow into this threshold)
  2. Evaluate the business processes which generate VAT returns that should be adapted to oblige with the new tax system (e.g. raising invoices or capturing expenses).
  3. Make sure that your accounting software is functionally compatible with HMRC
  4. Decide when is feasibly best for you to switch to Making Switch Digital for VAT.

As one of the UK’s fastest-growing accountancy firms, Baldwins offer expert support on how you and your business can grow alongside the Making Tax Digital initiative. We recommend making this switch as soon as possible to help streamline your business operations. 

To find out how we can help you and your business, fill out our contact form or alternatively call 0845 894 8966 to speak with a member of the team.