Making Tax Digital (MTD) is part of the government’s plan to make it easier for businesses and the self-employed to get their tax right the first time, avoid errors and fines, and to stay on top of their accounts.
This modern, digital service will also help to reduce the amount of tax that is lost due to avoidable errors. Small businesses, including freelancers, account for £13.4bn of the missing £31bn that is owed to HMRC each year by businesses and individuals not paying enough tax.
What are the current rules?
Since 1st April 2019, the majority of VAT registered businesses with an annual taxable turnover above the VAT threshold of £85,000 have had to keep digital VAT records and send their returns to HMRC using MTD compatible software.
Those businesses with an annual taxable turnover of less than £85,000 per year are not yet required to keep and submit digital records and tax returns, though they can voluntarily join the scheme.
What is changing?
Making Tax Digital for VAT
From 1st April 2022 all VAT registered businesses will be required to comply with the Making Tax Digital rules for their first tax return sent on or after 1st April, regardless of their turnover.
Making Tax Digital for Income Tax
Making Tax Digital for income tax has been delayed until 6th April 2023.
From this date all self-employed business owners and landlords with annual business or property income above £10,000 will be required to follow the rules for MTD for Income Tax from their accounting period starting on or after 6th April 2023.
Those joining MTD for income tax will have to send a quarterly summary to HMRC of all income and expenses, using MTD compatible software. They will receive an estimated tax calculation to help budget for their tax payments.
If you are a self-employed business or a landlord you can already voluntarily use MTD software to keep business records digitally and send income tax updates to HMRC instead of filing a Self-Assessment tax return.
How do the changes affect how you compile your VAT and Income Tax?
The new MTD rules mean that:
- Cut/copy and paste will no longer be allowed
- Spreadsheets must have a digital link so that cells between different worksheets are linked
- Compiling information from different software sources into the VAT return will now have to be done exclusively via digital links
- Any audited business must be able to show their compliance from source to report
If you have any questions about Making Tax Digital, or about getting your business ready or which software to use, feel free to get in touch with us here at Magpie Accountancy for advice.