Making Tax Digital - A Detailed Guide For Small Businesses

16 Nov

So, there are a few things as fundamentally radical as the government’s initiative to Make Tax Digital. It’s an idea that’s been brewing for a while now, and is the brainchild of the HMRC. It is their goal to become one of the most digitally advanced tax administrations on the planet.

The end goal of the project is to make it easier for everybody to get their taxes right and stay on top of key business. As a result, the Making Tax Digital initiative makes radical changes to the way that the tax system functions, with the intention of making tax administration both more efficient and more effective.

Background Information

So, this entire idea, known to many as MTD, is all about making the entire tax administration process entirely digital.

Originally, the initiative was meant to come into effect back in 2020 but this was delayed and staggered to roll out over the next few years until 2026, probably due to the consequences of COVID-19 and the large number of businesses that registered during the pandemic.

Income Tax

Any self-employed business or landlord business who has an annual business and property income over £10,000 will need to follow all the rules regarding Making Tax Digital specifically for income tax from April 2024.

Thankfully, there are already some businesses and agents who are providing updates and digital records to HMRC as part of their live pilot to both test and enhance the existing system. For example, if you’re a self-employed business owner or a landlord, you can use the software of your own free will to keep a digital record of business and send updates about income tax to HMRC instead of having to manually fill in a self-assessment tax return.

Corporation Tax

Naturally, the new system will also directly impact and influence those who have to pay corporation tax. This means that they will experience a similar overhaul to the tax system as is outlined by the Income Tax. However, this doesn’t start until 2026.

At the moment, the whole thing is in a prototype/beta stage which is currently being worked on. As a result, the government is currently in an open house situation where it is willingly taking viewpoints from companies and organisations alike to get some proper feedback on their plans.

Understandably, this makes it very difficult to know with any real certainty what the government is actually planning to do in regards to corporation tax because it is a very flexible entity that keeps changing.

Why Does This Matter?

Nearly everybody wants to get tax right. However, the latest tax gap figures show that this is difficult for some. Avoidable mistakes with taxes cost £8.5 billion between 2018 and 2019.

This new software is designed to be accurate and easy to use, offering access to convenient digital records for enhanced accuracy. Furthermore, the information that is sent directly from HMRC to businesses will help them fill everything out correctly, and the information sent by businesses to HMRC will guarantee that nothing slips through the cracks.

How To Become MTD Compliant

Here are the steps that you have to take to become MTD VAT compliant.

First of all, you have to register for the process because you are not enrolled automatically. This process basically gives HMRC permission to copy your existing VAT account from the old computer system over to the new. Once you have completed the step, it can take up to 72 hours to copy your account details. However, this is a very straightforward process that only takes about three minutes to complete.

The only thing is, you will need to sign up to the process or your business, email address, your government gateway details, VAT registration number, and your latest VAT return.

The next thing you need to do is sign up for a compatible app. These are important for registering your tax and earnings every few months. It’s important to find an application which has been recognised by HMRC as being valid. Alternatively, if you use an existing VAT spreadsheet, you can load it into the system.

Once you have done all of this, the app will prompt you to input your VAT details, and if you do, it will talk you through the process of connecting them to your new HMRC MTD account. this is a quick process there any takes a few minutes to alternatively, you can do this once you have registered for MTD and HMRC has fully copied your account details across to the new system

Finally, the only thing you have to do after that is download and display the latest information, including your submission form. You can make a submission by loading the spreadsheet into the new form. Alternatively, if you ever put invoices or expenses into the app, then it will populate the form for you. It’s important to stay on top of this.

Final Thoughts

So, it’s clear that these new changes will heavily impact the way that we deal with earnings and tax.

Making Tax Digital VAT is an important step towards creating a more accurate, comprehensive tax system. It’s definitely going to be employed by businesses throughout the country, and watching it become implemented across the board is definitely interesting.

As previously stated, this is not only going to affect VAT businesses. Every business that makes an annual turnover of more than £10,000 will have to submit to the new system from 2024. However, by that point, the system will be much more advanced.

These changes will help the government to make sure that everybody has a comprehensive, accurate, and complete list of earnings that they can use to generate tax payments. It’s definitely one of the most pioneering achievements of the government to date, but it’s important to make sure that it pans out in the right way. After all, the system needs to be perfect to support everybody.

stephen newall