It’s estimated over 40% of small business owners don’t know what Making Tax Digital means. So I have put together this blog to:
- Tell you what Making Tax Digital is;
- Explain what Making Tax Digital means for Self Employed Small Business Owners;
- Give you enough information to make an informed decision on how you carry out your bookkeeping & tax calculations now and once Making Tax Digital is officially rolled out.
What does Making Tax Digital mean
Making Tax Digital is one of the biggest ever shakes ups to affect the UK Tax System and it affects everyone who pays tax in someway, from Limited Companies to individuals on PAYE.
Making Tax Digital will require individuals and businesses to maintain their bookkeeping electronically and report on their income & expenses digitally to HMRC on a quarterly basis. This includes making quarterly tax payments to HMRC.
Making Tax Digital promises to make it easier for individuals and business owners to help them to stay on top of their 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 has 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
The key role out dates for Making Tax Digital are:
- April 2019: all VAT reporting by all VAT registered businesses with turnover above the VAT threshold will 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.
What Does Making Tax Digital Mean for VAT Registered Businesses
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 a MTD compliant bookkeeping software to calculate and submit your VAT Returns automatically to HMRC. This is known as Digital Record Keeping.
Digital Record Keeping for Making Tax Digital
Digital Record Keeping means you will need to enter every business transaction onto a bookkeeping software rather than just adding them together manually to work out totals for a VAT Return. The bookkeeping software then works out your VAT figures and submits them straight to HMRC.
That means the Government Gateway method of submitting VAT returns electronically will be scrapped.
For each transaction the following needs to be recorded:
- Tax Point
- Value of Supply
- Rate of VAT charged
Making Tax Digital and Record Keeping
Making tax digital does not affect how you keep copies of your business records. That part of business record keeping remains unaffected.
Making Tax Digital and Spreadsheets
Spreadsheets have been the subject of much discussion when it has come to Making Tax Digital. HMRC initially rejected their use but then, after much pressure, making a u turn and have set out rules that allows their use.
Spreadsheets are acceptable by using a ‘Bridging Software‘.
What is a MTD Bridging Software
A bridging software is a plugin that works with Excel and transmits figures from your spreadsheet straight to HMRC via an API connection.
This is perfect if you operate under special VAT Schemes like the Second Hand Goods Scheme.
The Future of Making Tax Digital
If your small business is not VAT registered then you remain unaffected until April 2020. Although this date is not officially confirmed, just planned.
From April 2020 HMRC intend for the tax system to be entirely digitised. Although details are of how this will work are sketchy, it is understood that everyone who taxes such as landlords, self employed and other non VAT registered businesses will need to report to HMRC digitally.
What Does Making Tax Digital Mean for Self Assessment Tax Returns
The annual self assessment tax return form due by the 31 January will be scrapped. Instead individuals will need to report on their income and pay tax quarterly based on 3 lines
By the end of four quarters a full years worth of income will have been reported. However a fifth return may become necessary to make year end adjustments that you need to work with your accountant on, for example to claim reliefs and allowances. Then a fifth and final update can be sent to HMRC to bring your figures in line and ensure you pay the right amount of tax.
Alternatively your 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.
What Should You Do Now
If your small business is VAT registered and use a non compliant 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:
- The date of your first MTD VAT Return;
- How you plan to Maintain Your Books Digitally;
- Planning your transition to Digital Record Keeping.
If you are not VAT registered then you are unaffected until the scheduled date of April 2020. However Making Tax Digital is coming and getting organised sooner rather than later will definitely put you in good stead.
If you haven’t get your bookkeeping organised by:
- Opening a business bank account (here’s how you can do that from your mobile phone+ a free trial)
- Set up a bookkeeping system on a MTD compliant software
- Get into the habit of doing your bookkeeping and filing your receipts
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