Something’s coming to all self-employed professionals and limited companies across the UK that you need to know about. It’s called Making Tax Digital, and it’s set to revolutionise the way you do your business tax returns.

But, for the average tradesman we encounter, it could turn into a nightmare.

In this two-part post, we’ll look at what Making Tax Digital is – and, more importantly, how it will affect you and your business tax returns.

This post starts with the basics…the what, the why, the how, and the when of the new system.

Making Tax Digital – What Exactly Is Making Tax Digital?

Making Tax Digital is a UK government initiative that sets out a bold vision for “a transformed tax system and the end of the tax return” by 2020.

Not sure what that means for you? Here’s what you need to know:

Making Tax Digital is about making tax administration more effective, more efficient, and easier for taxpayers, through the implementation of a fully digital tax system.

The roll-out of the initiative has already begun. Every small business owner and individual taxpayer now has access to a digital account that they can use to check their records and manage their details with HMRC.

Access to this account can also be provided to a third-party agent (which is another way of saying ‘accountant’ in government speak).

Further changes are planned in the coming months and years– more about this below. Meanwhile, accountants like us, together with third-party software vendors (we recommend Xero), are actively engaging with HMRC to help shape this process and simplify the considerable shift involved for small business tax returns.

When Will Making Tax Digital Happen?

A Making Tax Digital pilot scheme began in April 2017, with a phased rollout to unincorporated businesses starting in April 2018. Full implementation of the initiative is expected by 2020.

Businesses with a turnover between the minimum threshold of £10,000 and the VAT threshold will be given until April 2019 to comply.

By this time, you should see the following major changes to the way you manage and report your business taxes:

  • Through your digital account, you’ll be presented with a complete picture of your business’s tax affairs and be able to manage all of your liabilities at the same time, in the same place.
  • HMRC will collect and process information affecting tax in as close to real time as possible. This should prevent any tax due or repayments owed from building up.
  • You’ll no longer have to wait until the end of the tax year to know how much tax you have to pay.
Do You Have to Adopt the Making Tax Digital Initiative?

The changes outlined in the Making Tax Digital initiative will apply to a wide range of taxpayers, including most businesses, self-employed people, and landlords, as well as individual taxpayers.

However, HMRC has confirmed that it will legislate for an exemption “for taxpayers who cannot engage digitally” and that the legislation will be based upon the existing VAT online filing exemptions.

HMRC has also confirmed that there will be a minimum threshold of £10,000 annual sales at which the Making Tax Digital initiative will kick in.

What Changes Are Envisaged to the Scheme?

As Making Tax Digital is rolled out, a number of changes will be implemented. Following is a timescale of the developments that are most relevant to business owners:

  • Jul – Dec 2018: Businesses, self-employed people, and landlords with turnover above the VAT threshold start updating HMRC quarterly for Income Tax and National Insurance obligations through their accounting software.
  • 2019: Businesses with a turnover between the minimum threshold and the VAT threshold start updating HMRC quarterly for Income Tax and National Insurance obligations through their accounting software. MTD starts for VAT figures and returns.
  • 2020: Most businesses, self-employed people and landlords start updating HMRC quarterly for Corporation Tax obligations through their accounting software.

In Part Two, we’ll look more about how the Making Tax Digital initiative will affect small businesses – considering both the benefits and the difficulties posed by the scheme.

 

Note: 

HMRC has announced significant changes to the roll-out of its Making Tax Digital scheme, which was due to go live from April 2018.

The scope and timetable have now been pared back following feedback and concerns about the broad scope and short timescales from parliamentary bodies, businesses, the accounting profession and software companies, including Xero.

  • Only businesses with a turnover above the VAT threshold will have to keep digital records and only for VAT purposes. They will only need to do so from 2019.
  • Businesses will not be asked to keep digital records or update HMRC quarterly for other taxes until at least 2020, instead of 2018 as originally proposed.
  • Small businesses will be able to file digitally on a voluntary basis for other taxes.
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