What Making Tax Digital Means for Individuals and Businesses
Do you know what Making Tax Digital (MTD) means for your business?
***REVISION DATED 14/07/2017***
On 13/07/2017 HMRC announced significant changes to Making Tax Digital. However, despite the changes, the original vision remains the same and MTD will go ahead.
The changes are as follows:
- Only businesses with a turnover above the VAT threshold will have to keep digital records and only for VAT purposes. They will only need to do so from 2019.
- Businesses will not be asked to keep digital records or update HMRC quarterly for other taxes until at least 2020, instead of 2018 as originally proposed.
- Small businesses will be able to file digitally on a voluntary basis for other taxes.
SRK is following these changes and will ensure our clients and readers are aware of Making Tax Digital in real time, as it happens.
With the general election coming to an end, Making Tax Digital will soon inevitably be back on the Government's Agenda. So, it is time to be prepared. It is vital that all those affected actively adopt the new system to avoid disruption, penalties and fines. SRK has been digital since our conception, almost 6 years ago, so we've created this post to educate and reassure small business owners, self-employed people and landlords on what they should expect and how they will benefit from the change!
What is Making Tax Digital?
So, let's start with the basics and answer that loaded question, what is Making Tax Digital?
Making Tax Digital (MTD), initially announced in the March Budget 2015, is a government initiative that sets out a vision to 'transform' the current UK tax system, which will bring an end to the tax return by 2020. The main aim of MTD is to make tax administration more efficient and easier for businesses, self-employed people and landlords to get their tax right first time. Currently, £8bn a year in tax is not collected due to what HMRC classifies as 'avoidable taxpayer errors and carelessness'. The introduction of MTD should eradicate this cost to HMRC and therefore reduce HMRC investigations and the uncertainty and worry associated with such investigations.
Therefore, businesses will no longer be punished for making honest mistakes and errors.
Making Tax Digital for Individuals?
By 2020, there will be no more self-assessments (also known as a tax return) for over 10 million individuals. Instead, HMRC will replace tax returns with digital tax accounts. Like an online bank account, the digital accounts will bring together each taxpayer's details, from a range of sources, in one place. This will mean that individuals will be able to update their information, register for new services, view their tax affairs in real time and see at-a-glance how their tax is calculated, as well as see a list of payment options. Over time, customers will no longer need to complete tax returns at the end of the year.
Rollout has already begun with every small business owner and individual tax payer now with access to a digital account that they can use to check their records - learn more.
Making Tax Digital for Businesses?
By 2020, all self-employed individuals, landlords and incorporated entities with business income over £10,000 will be required to:
- Keep digital records of all their income and expenditure
- Submit these records electronically to HMRC
- Report at least once quarterly
Following feedback, businesses that have an annual turnover below the VAT registration threshold (£83,000 annual turnover) will not be required to start keeping digital records or provide quarterly updates until 2019, although they can choose to do so voluntarily.
Software - Whilst HMRC has stated that free software will be available to businesses with the most straightforward affairs; HMRC is working under the assumption that the businesses to qualify for this will be unincorporated, have income under the VAT threshold and have no employees. Therefore, for many small businesses HMRC will not will not provide the tools required for digital record keeping and submission. Xero and QuickBooks Online are both inexpensive, excellent accounting software options available to you.
Digital Record-Keeping - HMRC has confirmed that businesses will not have to make and store invoices and receipts digitally. However, whilst businesses can continue to keep paper documents, transactions will need to be stored digitally. Read How to Manage Receipts as a Small Business Owner to learn how you can improve your receipt management.
Quarterly Updates - Businesses will be able to choose their periods of account and their update periods. The basic requirement will be for four quarterly updates a year. The draft legislation does not allow HMRC to require returns more than once per quarter, but if a business chooses to submit extra updates mid-cycle, they can do. Submission will be expected from 10 days before the quarter end to one month after. The information required for submission will depend on the level of detail required by the current system of categorisation in the self-assessment return.
Three Line Accounts - Currently, businesses below the VAT threshold (£83,000 annual turnover) are eligible to use 'three line accounts', which means only income, expenses and profit need to be reported. Under MTD, these small businesses will be able to continue to report using only three lines of data. However, they will be expected to submit quarterly from April 2019.
End of Year Activity - The deadline for finalising taxable profit for a period will be the earlier of (whichever comes first):
- 10 months after the last day of the period of account, or
- 31 January following the year of assessment in which the profits for that period of account are chargeable to income tax (the existing self-assessment deadline).
This finalisation could be done at the same time as the final regular update for the year is submitted, but for businesses making year-end adjustments or claims to reliefs, it is more likely to be done later.
Exemptions to Making Tax Digital
- Small businesses, self-employed person and landlords with an annual turnover of below £10,000 will be exempt from MTD.
- Additionally, those that have a secondary income below £10,000 will also be exempt from digital record keeping and quarterly updates.
Making Tax Digital Timeline
The MTD obligations start with effect from the first accounting period beginning after 5 April 2018. The government is still considering the possibility of phasing in the obligations for some businesses.
FROM APRIL 2018 - Reporting for income tax by landlords, self-employed people and partnership businesses.
FROM APRIL 2019 - Reporting for businesses with income below the VAT threshold (£83,000 annual turnover).
- VAT reporting by unincorporated businesses, all partnerships and companies
FROM APRIL 2020 - Corporation tax reporting.
What Are the Benefits of Making Tax Digital?
Whilst MTD will offer challenges, individuals and businesses will benefit from the following:
- Through the digital accountant individuals and businesses will be able to see a complete picture of their tax affairs and be able to manage all their liabilities at the same time, in the same place
- HMRC will collect and process information affecting tax in as close to real time as possible
- MTD should prevent tax due and repayments from building up
- Individuals and businesses should no longer have to wait until the of the tax year to know how much tax they must pay, which will provide certainty and help to budget accordingly
MTD may affect the legal entity and/or accounting date you choose for your business, therefore if you are considering starting a business or looking to change the legal entity of your business, then download SRK's FREE New Business Kit, designed to help you with the financial, tax and accounting considerations of starting a new business.
We understand that Making Tax Digital is a challenging time for self-employed people, small businesses and landlords. If you are a SRK client, please contact your dedicated associate for any and all support that you require through this transition. If you are not currently a SRK client, we'd love to help by offering you a free consultation.
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