By Dan Matthews on Small Business - Advice and Ideas for UK Small Businesses and SMEs
Making Tax Digital explained
Making Tax Digital (MTD) is a government plan to shift paper-based tax reporting online, spelling the end of form-filling for millions of UK businesses. Changes affecting value added tax (VAT), income tax and corporation tax are being introduced over time, meaning a growing number of small firms are falling under MTD’s scope.
Businesses with turnovers higher than £85,000 are already required file quarterly VAT submissions digitally under MTD rules, records for which must be kept online and submitted via software. Those with a turnover lower than the £85,000 threshold will have to comply by April 2022.
Next in line for digitisation is income tax: individuals with a self employed or property income over £10,000 per year must adopt digital filing from 6 April 2023, while corporation tax will shift online sometime after 2026 following a pilot period, according to the latest plans.
What businesses must do under MTD rules:
- Keep digital records
- Submit summary information to HMRC once a quarter
- File an end of period statement to make any adjustments and a final declaration by 31st January each year.
Why is tax going digital?
There are many reasons for the introduction of MTD, but the main one is to increase the tax system’s clarity and efficiency for the benefit of both HM Revenue & Customs and the UK’s stock of businesses.
But there could be other benefits for entrepreneurs too, according to Jonathan Dowden, product marketing manager at Sage: “Take self-assessment tax returns for example: how much do you enjoy that time of year? Not a lot I bet; it’s quite stressful.
“The good news is that once the basic information is in a digital system, you can access it whenever you need to, so you won’t have to spend each January looking through your business transactions, receipts and invoices for your Government Gateway code because it will be saved.”
Under the new regime, a self-employed person must update their records once a quarter, instead of once a year. This is less time to lose all your receipts, which can’t be a bad thing, but it also helps to paint a clearer picture of your personal tax position.
“A big headache for sole traders is making sure they have enough money in the bank account when tax payments are due,” says Dowden. “When you submit accurate updates every three months, HMRC provides a tax estimate, giving you a much better view of your tax liability based on the information you have submitted and, therefore, a chance to plan.”
>Read more: The EU VAT e-commerce package: how accounting can help
What must businesses do now?
It might sound obvious, but businesses and the self-employed who keep digital records of sales and expenditure will find the transition to MTD a lot easier. Much better to log your figures once in a system that’s designed for the job than to ink them in a physical ledger first and upload the details later.
Dowden says: “With digital record-keeping, you don’t have to wait until April or the later deadlines, you can start doing it now. You can get Sage Business Cloud Accounting, for example, and begin inputting records; then everything is one place and it’s easy to manage.
“Think about what systems you’re using already. HMRC classes a spreadsheet as a digital record, but if you work with spreadsheets you’ll know it can be fiddly to establish a link between the raw data and a tax return.”
He advises reviewing your record-keeping and filing processes, seeking advice from your accountant and taking the opportunity to upgrade now, so that MTD deadlines come and go without a hiccup.
It could be a fiddly process without a good system in place. By getting organised now, you can reduce the impact of these tax wrinkles so that filing regular tax returns becomes ‘business as usual’ later on.
Software that gives you an edge
The best cloud-based accounting software not only makes transitioning to MTD easier, but also helps lock in the benefits of the new system to your business.
All your information is in one place, ready to go, not scattered in filing cabinets and drawers. You can slice and dice the information in numerous ways, like income, expenditure, customers and suppliers, giving you enhanced decision-making powers.
With Sage Business Cloud Accounting you can use the mobile app to take pictures of your receipts and update records instantly, on the go. By connecting the software to your bank account feed, all of your comings and goings are captured automatically, making self-assessments a doddle too.
These are just a some of the many benefits of MTD, says Dowden. “Technology does the heavy lifting so you can focus on the things you do best. No one gets into business because they enjoy doing their taxes; by taking advantage of the positive side of MTD, you can build efficiency, make better decisions and avoid cashflow issues.”
For full guidance on the Making Tax Digital, visit https://www.sage.com/en-gb/making-tax-digital/
This article is part of a paid-for content campaign with Sage
The post What is Making Tax Digital and why should you care? appeared first on Small Business.
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Dan Matthews, Khareem Sudlow
