HMRC introduced the first phase of its new digital tax initiative, Making Tax Digital (MTD), on 1 April 2019 and there are still changes to come which will affect the majority of businesses!
What is Making Tax Digital?
Making Tax Digital is HMRC’s plan to get small businesses, and the self-employed, to complete digital tax returns and hold digital records, with the eventual aim of going completely paperless!
By having digital records and the ability to complete digital tax returns HMRC have stated that businesses and individuals should find it easier to get their tax right and keep on top of their affairs.
The Making Tax Digital project has been split into different phases to represent each tax – VAT, Income Tax and Corporation Tax.
The first stage of the project came in 2019 for VAT. This involves keeping digital records and using accounting software, such as Xero, to complete VAT returns.
What is the next stage for Making Tax Digital?
The next stage of the project will affect all those businesses that are VAT registered but have turnover below £85,000. This means that those businesses may need to move onto a digital accounting software that will allow them to keep digital records and submit their VAT rerturns direct to HMRC.
After this, the Making Tax Digital project moves onto Income Tax. From April 2023, Self-Assessment taxpayers with business or property income above £10,000 will need to follow the rules from their next accounting period starting on or after 6 April 2023.
There is currently a pilot scheme in place with HMRC that allows you to send Income Tax updates to HMRC instead of filing a Self-Assessment tax return and HMRC says that this will lead to a more real-time system that lets you see how much Income Tax you owe as you go.
Now would be the best time to start planning for the introduction of Making Tax Digital for Income Tax and getting used to keep records digitally (if you are not already doing so)!
What about Making Tax Digital for Corporation Tax?
There is not much information about when Making Tax Digital will be introduced for Corporation Tax. This phase of the project has been pushed back a number of times and HMRC are waiting to see how the full VAT rollout goes before making any decisions.
If you are worried about Making Tax Digital and how it could affect you, or you want to automate your accounting function as much as possible, please talk to us as we can put your mind at ease and make sure you are properly prepared.
The content in this blog is correct as at 30 June 2021.