What does HMRC Making Tax Digital Mean?

HMRC Making Tax Digital is something that it’s estimated over 40% of small business owners don’t know about. But it is going to affect them.

So I have put together this blog to:

  1. Tell you what HMRC Making Tax Digital is;
  2. Explain what Making Tax Digital means for Self-Employed Small Business Owners;
  3. Give you enough information to make an informed decision on how you carry out your bookkeeping & tax calculations.

What does HMRC Making Tax Digital mean

HMRC’s Making Tax Digital is one of the biggest ever shakes ups to affect the UK Tax System.

It’ll affect almost everyone who pays tax in some way, from Limited Companies to self-employed individuals and landlords.  

If you are a self-employed business owner then you stand to get affected both business wise and personally.

HMRC Making Tax Digital is a complete digitisation of the tax system, requiring you to:

  • Maintain business bookkeeping electronically;
  • Report on income & expenses digitally to HMRC on a quarterly basis;
  • Make quarterly tax payments to HMRC.

Making Tax Digital promises to make it easier for self-employed business owners to help them to stay on top of paying taxes.

It also signals the end of the annual self-assessment tax return form due by 31 January each year.

Why is Making Tax Digital Happening

HMRC estimates that errors and mistakes results in over £9 billion lost taxes annually. This is a loss HMRC feel they can hugely reduce by forcing a switch from manual bookkeeping to full digital bookkeeping.

When Does Making Tax Digital Start

HMRC are phasing in Making Tax Digital according to tax status.

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 rollout in April 2019 for VAT is intended to act as a 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.

Making Tax Digital for VAT Registered Businesses

All VAT Registered Businesses are first to be affected, whether you have a Limited Company or are self-employed.

This means that from 1st April 2019 you will need to use an MTD compliant bookkeeping software to calculate and submit your VAT Returns automatically to HMRC.

This is known as Digital Record Keeping.

The Government Gateway method of submitting VAT returns electronically will be scrapped.

Digital Record Keeping for Making Tax Digital

Digital Record Keeping means entering every sales and purchases transaction that make up the figures on your VAT return, one by one into an HMRC approved bookkeeping software.

This means if you add your VAT up either manually from your invoices or with a spreadsheet, then input the figures into a VAT return on the Government Gateway, you’ll need to make some changes.

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.

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

Making Tax Digital and Record-Keeping

Making tax digital does not affect how you keep copies of your business sales and purchase invoices.

That part of business record-keeping remains unaffected.

HMRC don’t want to see all your invoices each time you submit a tax return, they just want to know that you have used one of their approved softwares to work out your VAT.

What Should You Do Now

If your small business is VAT registered and use a non approved or manual bookkeeping system like a spreadsheet them you may need to start considering how you are going to be affected from 1 April 2019.

Here’s what you need to think about:

  1. The date you need to submit your first MTD VAT Return;
  2. How you plan to Maintain Your Books Digitally using an approved bookkeeping software;
  3. Plan your transition to Digital Record Keeping.
  4. Read my 3 Point Checklist to Getting Your Small Business Making Tax Digital Ready.
Anita Forrest
About Anita Forrest

Anita Forrest is a Chartered Accountant, spreadsheet geek, money nerd and creator of www.goselfemployed.co - a UK small business finance blog where she shares help and advice with the self-employed community to make topics like registering a business, bookkeeping and taxes easy to understand.