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:
- Keep digital business records;
- Report figures quarterly to HMRC;
- 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
- 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,
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
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
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:
- April 2019: all VAT reporting by all VAT registered businesses with turnover above the VAT threshold must be via the Making Tax Digital process;
- 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:
- Opening a business bank account (here’s how you can do that from)
- Set up a bookkeeping system on a Making Tax Digital approved software
- Get into the habit of doing your bookkeeping and filing your receipts
New Here? These are my most popular resources:
- The Ultimate Bookkeeping Spreadsheet – Organise your money, track the numbers that matter and stay on top of your cash;
- FREE Guide: 11 Common Small Business Setup and Tax Mistakes – Are you worried your business isn’t set up correctly? Use this guide to identify whether you’re making the 11 most common financial pitfalls I’ve seen when it comes to setting up a business and taxes, as well as finding out how you can put them right;
- Sole Trader or Limited Company? – Download my free calculator to check which business structure would help you to pay less tax;
- FREE Business Expenses Cheatsheet – Check what you can and can’t claim as an expense against your taxes.
- 6 Core Elements of Self-Employment Taxes – Confused by taxes? Worried you’re missing something when it comes to tax allowances and reliefs? These easy to follow 6 mini-guides will have you on top of the tax side of things in no time at all.