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Making Tax Digital: What You Need to Know

HMRC recently introduced a fundamental change to the way the UK tax system works. It’s called Making Tax Digital, and it’s being rolled out across the country over the coming years.

If Making Tax Digital is new to you, or you’re not sure if the changes apply to you or not, don’t panic. We’re here to guide you through the process, and tell you everything you need to know about one of the biggest changes HMRC has introduced in its history. So, let’s get started.

 

What is Making Tax Digital?

Making Tax Digital is a new way to record and share information with HMRC. The changes now known as Making Tax Digital were announced as part of HMRC’s mission to become one of the world’s “most digitally advanced tax administrations.”

Quite simply, Making Tax Digital means that instead of submitting annual year-end tax returns, HMRC will require businesses to use digital software to record all required accounting information. This digitally stored information will be accessible by HMRC.  

Making Tax Digital will provide all businesses and sole traders with their own Personal Tax Account, making it much simpler to calculate taxes owed. These digital records will allow all users greater accuracy when it comes to their accounts, helping to avoid mistakes which currently cost the Exchequer over £9 billion a year.

The new Personal Tax Account, which can be accessed from all digital devices, will also enable taxpayers to avoid any nasty surprises when it comes to their tax bills. Tax returns will be quicker and easier to file at the end of the year, and businesses will be better able to budget for their end of year tax bill.

Who Does Making Tax Digital Apply To?

Don’t be alarmed if this is the first you’ve heard of Making Tax Digital. The changes do not yet apply to everyone, and even if they do apply to you, you’ve got plenty of time to implement any required reforms in your own accounting processes.

Making Tax Digital for VAT is the first step in this overhaul of the UK tax system, and it’s set to kick off from 1 April 2019. So, the first businesses to be introduced to Making Tax Digital will be those who are VAT registered. If you run a VAT-registered business and your taxable turnover exceeds the VAT threshold of £85,000, you will need to keep digital records of your accounts via MTD compatible software, in readiness for your 1 April 2019 VAT returns.

If your turnover is below the VAT threshold of £85,000, and therefore you are not VAT registered, you have until at least April 2020 to prepare for the changes. However, you can still choose to start using digital software to record your accounts if you’d like to get ahead of the game.

 

Who is Exempt from Making Tax Digital?

Whilst Making Tax Digital is being rolled out for all VAT-registered businesses, there are some exemptions to the program. Of course, not every business in the country will be physically able to comply with the new legislation, so if a business is unable to make itself MTD-compliant, it will be considered for exemption.

Charities and fundraising work will be exempt from Making Tax Digital, but trading subsidiaries operated by charities will need to comply with the changes. Other exemptions include those who are referred to as ‘digitally excluded’. These people are unable to use accounting software for reasons such as disability, remoteness, age or religion. And if your business is already exempt from online VAT submissions, you won’t need to comply with Making Tax Digital reforms.

 

How Can I Prepare for Making Tax Digital?

The first step in getting your business Making Tax Digital ready is signing up for and starting to use MTD-compliant accounting software. A huge number of different accounting software packages are able to fulfil the functions needed for MTD, so there are plenty to choose from.

If you’re wondering whether your current software is MTD-compliant, you just need to check if it can do the following:

  • record and preserve digital records
  • provide information and returns from data held in those digital records to HMRC via the API platform
  • receive information from HMRC via the API platform

You do not necessarily need to use one software product to manage all three tasks. HMRC accepts that some businesses might need to use various different products to meet these obligations. Digital records can be kept across a range of different formats, they just all need to be compatible.

KashFlow’s online accounting software will be Making Tax Digital compliant ahead of the deadline. Visit our MTD Hub to learn the latest information.

 

What Digital Information Do I Need to Keep?

By law, certain records and accounts must be kept by all VAT registered businesses in the UK. The changes which will be brought about by Making Tax Digital will affect the information and records businesses need to keep, and how they need to keep them.

The software which you choose to use to comply with Making Tax Digital will keep your VAT records and accounting information, however you might also need to save original documents too. An example is the C79 VAT certificate, which must be preserved for tax purposes.

There are two ways in which you can use your Making Tax Digital software to store your information. The method you choose affects the digital and original information you’ll need to preserve. Let’s take a look at two examples.


Example 1)

When you receive an invoice, you can manually enter all the invoice data into your MTD-compatible software. This is perfectly fine, but you will need to keep the original document too, as the software will not serve as a copy of the invoice, should you need it at a later date.


Example 2)

You might choose MTD-compatible software which automatically scans all your invoices, inputting the information straight into your ledger. If your software retains the scanned image of the original invoice, complete with all the information on it, you can discard the original invoice.

 

Help! I Don’t Know Where to Start

HMRC accepts that big changes such as this can be a headache for some business. That’s why there are plenty of helpful resources which you can use to get yourself set up and ready to go. Take a look at the range of HMRC support services and webinars, and check out the KashFlow Making Tax Digital resources.

These resources have been designed to answer the most common queries surrounding Making Tax Digital. However, if you’re still scratching your head and struggling to find the answer you’re looking for, you can always contact us directly for one to one help.

 

Sign Up for Your Free KashFlow Trial

Making Tax Digital sounds overwhelming at first, but once you overcome the first few hurdles you’ll soon find that accounting and tax returns become simpler than ever. This new way of storing information is set to turn the traditional end of year tax return on its head, and make budgeting for your tax bill so much easier. Sign up to KashFlow today to get the wheels in motion and you’ll be MTD-compliant long before the deadline.

See how KashFlow works with your business and your books