The UK’s tax system is evolving to keep up with new ways of working in the digital age. As the government moves to digitise the entire tax system step-by-step, businesses are now being asked to comply with the MTD, or Making Tax Digital, initiative. While it can seem daunting at first, complying with MTD is easier than you might think, thanks to MTD compliant software.
How to Prepare for Making Tax Digital
Making Tax Digital is probably already affecting your business in some way. With the new tax year now underway, it’s time to make sure your business is compliant:
- Understand what MTD is and what it means for the way you report your taxes
- Find out if MTD applies to you and your business, and how soon you need to comply with the new way of reporting
- Start preparing by getting the right software in place that’s MTD compliant.
What is MTD?
HMRC, the UK authority that manages taxation, introduced MTD in an effort to make tax reporting easier to get right for businesses and individuals. Whereas in the past you might rely on paper records or errant spreadsheets, the government is now asking all businesses to bring their tax records onto a new digital system.
Right now, MTD applies to VAT submissions for businesses, and later self-employed people. The plan, however, is to roll this out to cover income tax and corporation tax eventually too.
The government has recently estimated that MTD ensured an additional £185m to £195m was collected in the 2019 to 2020 financial year, so it’s perhaps no surprise that HMRC is keen to roll this out to all areas of tax.
Does MTD apply to my business?
The big question you might be asking is: when will MTD affect me and my business? At what point do I need to start complying with the new way of filing VAT submissions to HMRC? The answer is that there are different deadlines for businesses of different sizes and for different types of tax.
MTD was first introduced as a requirement for nearly all VAT-registered businesses with a taxable turnover above £85,000 in April 2019. Since then, businesses of this size have had to use MTD digital software to track and submit digital records to HMRC for VAT.
Now, as of 1st April 2022, this has been extended to all VAT registered businesses in the UK. So anyone responsible for a VAT registered business must now become compliant and start using MTD software. While there are different options available for businesses, for the first time all of them must use software that is MTD compliant and links to HMRC.
It is also worth noting that in April 2024, MTG will apply for income tax for self-employed businesses. And finally, in April 2026, there is a possibility that MTG will apply for corporation tax too.
How can your business prepare?
MTD was introduced so that all businesses need to keep digital records for VAT, and done so in a way that can be harmonised with HMRC’s own systems. This means that businesses must use compatible software that can send details directly to HMRC via digital links.
The good news is that there are a range of options when it comes to MTD compatible software. Some are more simple, while others can offer many more features that help you run and manage your business. Crucially though, you must check that the software you use is MTD compliant, and if you change the software that you use, you must ensure that the connection your business has to HMRC is switched too.
While there might be some investment in time to decide on what software to use, once your MTD accounting tools are ready to go, they will almost certainly save you time and money in the long term. Crucially, you need to get to a position where you can track all your records digitally, including invoices and business tax numbers. You might already have these kinds of tools in place though for tracking other things like expenses.
While changing the way you manage VAT for your business might seem daunting at first, making your tax digital is actually easier than you might first think. As compliance has now become mandatory for all businesses, it’s vital that you choose the right MTD compatible software for your needs. But your business is not alone, and software that can be set up in minutes is ready and able to bring your tax reporting into the 21st century.
