What’s Going On – Latest on Making Tax Digital (MTD)
Making Tax Digital (MTD) represents a series of efforts by the government to make it easier for individuals and businesses to keep on top of their tax affairs and get their tax right. The rules will mean that individuals and businesses will need to keep digital records, and send regular updates to HMRC.
Certain announced changes have been postponed by the government in the past. This article provides an update of the latest position for businesses and individuals.
Since 1 April 2019 (1 October 2019 for some more complex businesses), MTD for VAT has required that businesses with turnover over the VAT threshold (£85,000 in 2020/21) keep their records in a digital format, and submit their VAT returns using software. In practice this means that a business must use HMRC approved software to do their bookkeeping/accounts, and to utilise this software to make the VAT returns to HMRC.
Previously, when a VAT return was submitted, HMRC would simply receive the totals of the sales, expenses, and input and output VAT. The use of approved software means that HMRC will now have details of the business’s underlying transaction data, so can see how these figures are made up.
Business can opt to use spreadsheets to keep their accounts, instead of approved software. However, the business will need to utilise some form of “bridging software” in order to make their VAT returns to HMRC from the spreadsheet records.
This system will apply to all VAT registered businesses (regardless of turnover), on their first VAT return starting on/after April 2022.
MTD for income tax is scheduled to come in from April 2023. This will apply to self-employed individuals, unincorporated businesses, and landlords with gross income over £10,000.
Currently, such individuals/businesses report their income on an annual self-assessment tax return, due by 31 January after the tax year end.
The new MTD system will require these taxpayers to make quarterly submissions of income and expenses to HMRC, and in turn HMRC will provide estimated tax calculations to allow the business to budget their tax. At the end of the year, the individuals/businesses will then add in any additional information such as employment income, interest, dividends, and student loans etc. The objective being that this system will replace the need for a self-assessment tax return.
Currently, businesses can voluntarily use software to report their income to HMRC quarterly, as a part of a pilot scheme, instead of filing a self-assessment tax return.
You may be excluded from the electronic record keeping and filing elements of MTD where you are unable to adequately use the systems due to age, disability, location, or religion. Any exceptions will need to be approved by HMRC.
HMRC will be consulting this Autumn on the detail of extending MTD to companies.
Some of these changes will not come in for some time, however it would be prudent to begin making changes to your systems now in preparation for a move to a digital system (whether that means incorporating new software, or speaking with your accountant/tax advisor to plan accordingly).