A Guide to Making Tax Digital for Small Businesses
26/11/2020
What is Making Tax Digital?
Following on from the introduction of the personal tax account which aims to make it easier for individuals to manage their tax affairs, HMRC has launched a scheme called Making Tax Digital (MTD) which allows small businesses and the self‐employed to complete digital tax records and returns.
At the moment Making Tax Digital only applies to VAT-registered businesses but eventually, all businesses will have to comply.
The scheme is being introduced gradually. Making Tax Digital for VAT started from 1 April 2019, affecting VAT-registered businesses with a taxable turnover above the VAT threshold of £85,000.
From April 2022, all VAT registered businesses will need to comply with Making Tax Digital for VAT.
And from April 2023, Self Assessment taxpayers will need to comply with Making Tax Digital for Income Tax.
Making Tax Digital Deadlines
Here are the Making Tax Digital deadlines for VAT registered companies and those taxpayers that file Self Assessment Income Tax:
April 2019:
- VAT registered businesses with a taxable turnover above the VAT threshold of £85,000 need to keep digital records and submit digital VAT returns using compatible software
- For lots of businesses, this means from accounting periods starting on (or after) the 1 April 2019 Making Tax Digital deadline
- Some ‘more complex’ businesses were given a six‐ month deferral
April 2022
- MTD will be compulsory for businesses with a turnover below the £85,000 VAT threshold
April 2023
- MTD will apply to taxpayers who file Income Tax Self Assessments for business or property income of more than £10,000 a year.
- ‘More complex’ businesses include trusts, ‘not for profit’ organisations that are not set up as a company, VAT divisions, VAT groups, those public sector entities required to provide additional information on their VAT return (such as government departments and NHS Trusts), local authorities, public corporations, traders based overseas, those required to make payments on account and annual accounting scheme users.
Making Tax Digital for Sole Traders
Making Tax Digital for Income Tax will launch in April 2023 and will apply to landlords and self‐employed people who make over £10,000 per year. If you fill in a Self Assessment tax return, you can sign up for a digital tax returns pilot scheme which will let you get used to the process before the 2023 deadline.
Once fully operational, MTD will let you see how much Income Tax you owe throughout the year.
Making Tax Digital for Corporation Tax
The exact details of the part of the scheme relating to Corporation Tax have yet to be confirmed and it expected that more will be published once the lessons from the VAT rollout are understood. It is worth keeping an eye on the government website which is being updated regularly.
Making Tax Digital for Landlords
If you make more than £10,000 a year from your rental properties, you will need to sign up for Making Tax Digital by April 2023.
Making Tax Digital Software
You’ll need to use compatible software to keep records and send an income and expenses summary to HMRC every three months, this will allow you to see estimates of how much tax you’ll owe as the year progresses.
At the end of the accounting year, you will submit a final report and your tax for the year will be calculated. This is the point at which you’ll claim any allowances and reliefs.
A business using MTD will need to use software which is compatible with the scheme; there are lots on the market and many, such as Sage, Xero and QuickBooks will be familiar to those businesses already. If you use more than one piece of software, you will need to ensure that they are linked electronically.
Not all businesses will be using accounting software so you may need to consider which is best for you, the cost of the software package and any hardware and training that you need to purchase.
Related Guides
A Guide to Expenses for a Limited Company
So now you know what Making Tax Digital is, how it works and the deadlines relevant to you.
You might be wondering: what's next?
Why not check out some of our related guides for more useful business tips. Or, if you're a small business owner, you can use our FREE business valuation calculator to instantly find out how much your business could be worth.
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