Making Tax Digital for the Self-Employed

If you’re self-employed, then HMRC’s Making Tax Digital will change the way you have to handle your taxes.

What is HMRC Making Tax Digital

Making Tax Digital is the total digitisation of the UK Tax System. What that means is that if you are self-employed you’ll need to:

  1. Keep digital business records;
  2. Report figures quarterly to HMRC;
  3. Pay taxes quarterly.

1. What are Digital Business Records

Digital Record Keeping means entering every sales and purchases transaction for your business, one by one into an HMRC approved bookkeeping software.

For each sales and purchases transaction you’ll need to record:

  • Date or Tax Point
  • Value of Supply
  • Category
  • Rate of VAT used

Approved Making Tax Digital bookkeeping systems, like Quickbooks, all require you to enter this information as standard. So that will make being Making Tax Digital compliant easier.

Your bookkeeping system will then work out your VAT figures and transmit them straight to HMRC from the system (once you approve the figures).

2. Quarterly HMRC Reporting

Under Making Tax Digital, self-employed individuals will need to report to HMRC on their income and pay tax quarterly based on 3 lines,

  • Income
  • Expenses
  • Profit/Loss

What Does Making Tax Digital Mean for Self Assessment Tax Returns

Making Tax Digital signals the end of the self-assessment tax return that is due by 31 January each year.

By reporting four quarters, a full years worth of income will have been reported. So this removes the need for the annual self-assessment tax return, covering a full years income.

Under making tax digital, a fifth return may be necessary to make year-end adjustments. For example to claim annual reliefs and allowances. So this fifth and final update will bring your figures in line and ensure you pay the right amount of tax.

Alternatively the fourth quarter return can be your final return to close off your tax year.

It does still remain unclear on the exact mechanism for reporting these figures, as well as which approved softwares you can use.

3. Quarterly Tax Payments

Yep, it’s happening. Quarterly tax payments based on the figures you provide to HMRC, will become obligatory.

It means you’ll stay on top of your taxes, which can be good if you are self-employed.

However, if your earnings are not consistent it could leave you out of pocket. Especially if you make a large profit in one quarter followed by a loss in another.

When Will Making Tax Digital Be Introduced for the Self-Employed

HMRC are phasing in Making Tax Digital according to tax status, which means if you are self-employed you may be affected from April 2019.

The timeline for Making Tax Digital is currently:

  1. April 2019: all VAT reporting by all VAT registered businesses with turnover above the VAT threshold must be via the Making Tax Digital process;
  2. April 2020, at the earliest: Everyone else who pays taxes such as landlords, self-employed and other non-VAT registered businesses will need to report to HMRC under the Making Tax Digital guidelines.

The initial roll out in April 2019 for VAT is intended to act as test of the entire system before the complete digital reporting system is rolled out.

It’s worth noting that Making tax Digital so far has faced delays, in part due to Brexit.  So the April 2020 deadline is yet to be officially confirmed.

If your small business is not VAT registered then you remain unaffected until April 2020.  Although this date is not officially confirmed, just planned.

What Can Self-Employed Business Owners Do Now to Prepare for Making Tax Digital

If you are self-employed, getting organised sooner rather than later will definitely put you in good stead.

You can start to get your bookkeeping organised by:

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Anita Forrest
About Anita Forrest

Anita Forrest is a Chartered Accountant turned entrepreneur who helps the self-employed gain financial confidence when it comes to running the numbers side of their business and filing tax returns with guides, templates and resources on the Go Self-Employed website.