Making Tax Digital (MTD) is a Government initiative to modernise HMRC’s tax system by making the process of administering tax simpler, more efficient and easier for taxpayers.
Put simply, MTD involves using compatible software to manage your tax affairs online with HMRC.
At present, the MTD rules only apply to those businesses with a UK taxable turnover above the VAT registration threshold of £85,000, as voluntarily registered businesses have the option to sign up to MTD.
However, from 1 April 2022, MTD for VAT is no longer optional and will become mandatory for all UK VAT registered businesses.
Then, from 6 April 2023, MTD is being expanded to include Income Tax for self-employed businesses and landlords with a combined total gross income of more than £10,000 per annum from the following sources:
- Income from self-employment
- Income from partnership
- Income from UK property
- Income from overseas property
There are, however, exceptions:
- Trusts, estates, trustees of registered pension schemes and non-resident companies will not be required to join MTD for Income Tax Self-Assessment.
- Partnerships that have corporate partners and Limited Liability Partnerships, are not required to join MTD for Income Tax Self-Assessment in April 2023 but will be required to join MTD at a later date.
What are the requirements under MTD?
MTD for VAT:
1. You will be required to sign up to MTD for VAT if you are not already submitting MTD VAT returns to HMRC. As part of the sign-up process, you will be required to create a new direct debit for VAT payments. If you would prefer us to sign you up, let your key contact know.
2. You will be required to keep digital business records for the first VAT period commencing on or after 1 April 2022, and all VAT periods thereafter.
3. You will be required to use MTD compatible software to submit your VAT returns to HMRC for the periods commencing on or after 1 April 2022.
4. If more than one software package or spreadsheet is used, they must be digitally linked.
MTD for Income Tax Self-Assessment:
1. You will be required to keep digital business records of all your business income and expenses, including income from self-employment or property, at a transaction level.
2. You will then need to use MTD compatible software to send updates to HMRC on a quarterly basis.
3. There will be at least five ‘returns’ each year instead of one. From April 2023, summary information will have to be reported to HMRC on a quarterly basis for each source of income, within one month of the relevant quarter-end.
4. At the end of the tax year, there will then be an end-of-period statement to report any accounting adjustments. In addition, you will also have to submit a final declaration to HMRC which includes details of all other income, as well as pay the tax you owe by 31 January of the following tax year.
5. There will be a tax calculator to estimate the taxpayer’s tax liability for the year after the submission of each quarterly return.
What are my options for digital record keeping?
- Cloud accounting software
Using cloud accounting software will ensure that you are MTD compliant. Instead of saving your accounting information on your desktop computer, cloud accounting software stores your information on remote servers in ‘the cloud’. Cloud software is incredibly flexible – it gives you access to real-time information about your business finances anytime, anywhere – providing you have internet access.
If you are currently using spreadsheets, you can either upgrade to software that supports MTD or continue to use spreadsheets in combination with bridging software. Since spreadsheets are capable of recording and storing digital records, they can still be a component of the MTD compatible software.
- Bridging software
Bridging software is a digital tool that is used to connect accounting software, including spreadsheets, to HMRC, meaning the required information can be reported digitally. Bridging software can be used if you want to continue using spreadsheets, bespoke accounting software which is not MTD compliant or where partial exemption calculations are involved.
What can I do now to prepare for MTD?
Use a business bank account for business transactions
If you are using your private bank account for business transactions, we strongly recommend opening a separate business bank account in preparation for MTD. This will ensure that private transactions are excluded from your business transactions.
What if I am already using compatible software?
If you are already using digital software to record your business income and expenses at a transaction level, then there is nothing further you need to do at this stage to prepare for MTD. We will be in contact with you in due course as more information is released by HMRC regarding the MTD registration process.
How we can help
Please get in touch with your usual contact or speak to our MTD Advisory Team at firstname.lastname@example.org if you would like any further information on the options available to you.