HMRC’s Making Tax Digital (MTD) has been in place for nearly three years now and so many small businesses will be familiar with the strategy. The policy was first mooted in the 2015 Budget, with the overall 10 year strategy for the government to create a tax system fit for the challenges and opportunities of the 21st century. Essentially, it was envisaged that it would bring about the following benefits:
- Eliminate manual or paper-based processes
- Provide greater accuracy (and minimising errors)
- Reduce the time spent on admin
- Create productivity benefits
In this first phase, MTD has been applied to VAT registered businesses that had a turnover in excess of the VAT registration turnover threshold of £85,000. VAT registered business trading below this level could register for MTD voluntarily. However, as from April 2022, the policy is being extended and all VAT-registered business will need to apply the MTD for VAT rules. It is estimated that this could bring a further 1 million small businesses into the MTD obligations. Now is therefore an important opportunity to consider if your business needs to act. Although the government focus is very much on the benefits of MTD, there are no doubt some serious decisions and potential costs that business will face.
You may ask, so what are the requirements to comply with MTD for VAT? In essence, the requirement is that you keep digital records and use third party software to submit your tax returns. For business using up to date software this should not create too much difficulty, but for those businesses using spreadsheets or a traditional cashbook, there may be a little more to consider. A full digital record will comprise:
- business name
- principal place of business
- VAT registration number
- VAT scheme
[table id=12 /]
The digital record that you keep does not have to be in a single place or program. Where you do have different systems, it is important that there are digital links to transfer any data. This in in essence an electronic link and does mean that you cannot simply manually transfer data between programs. For many businesses, the simplest answer will be to use one of the many cloud-based bookkeeping softwares on the market. If you have been using spreadsheets to keep your records, it is however possible to use bridging software to maintain the digital links and submit returns to HMRC through an API platform.
HMRC have in the first instance focused on VAT, in terms of applying MTD. The next step however will be to apply to Income Tax Self- Assessment (ITSA) from April 2024. This will see businesses with an income over £10,000 (to include self-employed, partnerships and property business) required to keep their records digitally and make quarterly submissions of their income and expenditure to HMRC. This will coincide with the demise of the annual self-assessment personal tax return as we know it, for those impacted.
Edge Tax have been helping business meet their MTD obligations over the past three years. If we can assist your business to move forward, we would like to hear from you.