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What does Making Tax Digital mean for businesses?

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Making Tax Digital has changed the way your business pays its taxes to HMRC. The first of these changes came into play in April 2019. This article sets out what Making Tax Digital means for you and your business. It also answers a series of common questions that you may have about the new legislation.

What is Making Tax Digital?

Making Tax Digital is a scheme by the UK government to make it easier for businesses and individuals to manage their taxes. The first stage started on 1 April 2019 and is called Making Tax Digital for VAT.

From that date, VAT-registered businesses (those companies with their turnover over the VAT threshold, which is currently £85,000) are required to digitally submit their tax records to HMRC. They will no longer be able to do this via HMRC’s Government Gateway.

What was the original goal of Making Tax Digital?

Transforming the tax system by 2020 was the UK government’s original goal. The plan was to introduce digital record keeping while also bringing in quarterly updating for landlords, the self-employed and businesses, covering self-assessment, corporation tax and VAT.

A phased introduction of Making Tax Digital was put forward by the government, with the plan of it being implemented between the 2018-19 and 2020-21 tax years. However, this was revised in 2017 and delayed to April 2019, with Making Tax Digital for VAT the first area to come into fruition.

Making Tax Digital background: What was announced on 13 July 2017?

On 13 July 2017, HMRC published its second Finance Bill of 2017, which included changes to the proposed Making Tax Digital initiative.

The government said it believed that introducing a new digital tax system was still the right direction to move in. However, it made amendments to the businesses impacted and the timescales for change. The amendments to Making Tax Digital meant:

  • Only VAT-registered businesses will need to keep digital records and only for VAT purposes.
  • They will only need to do so from 1 April 2019.
  • Businesses will not be asked to keep digital records or update HMRC quarterly for other taxes until at least April 2021 (the original dates had implementation from April 2019, then 2020).

What does that mean for businesses?

If you are VAT registered, you need to move to digital record keeping (i.e. use software to record all your VAT invoices and receipts). If you are not VAT registered then digital record keeping is optional. However, these business owners can gain updated income tax estimates whenever they want, which will help with cash flow forecasting.

Answers to common Making Tax Digital questions

As your business is likely to have questions about Making Tax Digital and what it means for the company, here are some answers to queries you may have.

My company uses spreadsheets for business records – what will that mean for me?

You can still continue to use spreadsheets to digitally record and store your business records. However, you will need to make sure those spreadsheets can digitally submit any necessary data to HMRC.

One way to do this is using an API-enabled spreadsheet (meaning you can submit your records to HMRC using an API link). Another option is to start using MTD-enabled software.

My business is not VAT registered and I don’t know if I will earn £85,000 this year. What should I do?

You are only required to follow the rules of Making Tax Digital if your turnover exceeds £85,000 – the VAT threshold.

To keep your finances in check, it’s worth monitoring your taxable turnover on a monthly basis to see if you do exceed this figure at any time. Software can help you to stay on top of this so you can make sure you comply with VAT registration requirements.

At the end of any month, if the value of your taxable supplies in the previous 12 months or less goes over the registration threshold, then you will need to be VAT registered. And this will mean you come within the scope of Making Tax Digital.

The same goes for any time where you expect the value of your taxable supplies will go over the registration threshold in the next 30-day period alone.

What if I temporarily go over the VAT threshold?

If your business isn’t VAT registered and you go over the threshold, you need to comply with the requirements of Making Tax Digital. If your taxable turnover then drops below the threshold, you still need to continue complying with the legislation.

However, if you de-register from VAT then you don’t have to continue following the MTD rules. The same goes for if meet one of the following exemptions, as per HMRC’s VAT notice:

  • your business is run entirely by practicing members of a religious society whose beliefs are incompatible with the requirements of the regulations (for example, those religious beliefs prevent them from using computers)
  • it is not reasonably practicable for you to use digital tools to keep your business records or submit your returns, for reasons of age, disability, remoteness of location or for any other reason
  • you are subject to an insolvency procedure.

My business is under the VAT threshold but I want to be part of Making Tax Digital. Is that possible?

Yes. Your business can choose to waive exemption if you wish to voluntarily follow the requirements of Making Tax Digital. Sid Moore, founder of Moore Accountancy, talks about the benefits of being VAT registered even if your company is under the £85,000 threshold in this article on understanding and managing VAT for your business.

We’re here to support you with Making Tax Digital

We are committed to helping small businesses adapt their technology to ensure the transition to the new digital tax system is a smooth one. We will support you every step of the way and continue to work closely with HMRC to help clarify exactly what Making Tax Digital means for you and your business.

We have a range of accounting solutions for small businesses and their accountants to help you become familiar with keeping digital records.

To help you stay informed, keep following Sage Advice for regular updates and stay on top of any developments related to Making Tax Digital.

Editor’s note: This post was originally published in July 2017 and has been updated for accuracy and relevance.

The ultimate guide to Making Tax Digital

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