Are you ready to pay Registered Gas Engineer looks at how the government’s Making Tax Digital initiative will affect you and how to prepare.
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very business and all selfemployed traders must submit records of their sales, profits and expenses to HM Revenue & Customs (HMRC) each year, so they can calculate and pay the correct taxes. This process is now changing with the introduction of the Making Tax Digital (MTD) initiative. HMRC has set out its ambition to be one of the most digitally advanced tax administrations in the world, modernising the tax system to make it “more effective, more efficient, and easier for customers to comply”. First introduced through the Finance (No.2) Act 2017, MTD is a key part of this goal, which HMRC says will make it easier for individuals and businesses to keep on top of their tax affairs. Under MTD, businesses and
records will reduce the amount of tax being lost. MTD is being rolled out in stages. VAT-registered businesses with a turnover above £85,000 have had to comply with this legislation since April 2019, and 2022 will see the scheme expanded to cover all VATregistered businesses. Sole traders and self-employed people will have to comply from April 2023. What records do I need to keep? The government says it’s not asking VAT-registered businesses to keep any additional records, but rather that everything must now be kept in a digital format to reduce the risk of manual typing or transposing errors. The VAT records you must
“Every trade business shoud be considering their plans for MTD: don’t get caught out at the last minute and plan early so that your finances are in check.” sole traders will need to keep their VAT and income tax records digitally, then use compatible software to send information to HMRC. Submissions must be made every three months, although any taxes due will need to be paid yearly. After each quarterly update, you’ll be able to see a year-todate calculation of how much tax you owe. The government says this will help to reduce errors, cost, uncertainty and worry, so that you can be confident you’ve got your taxes right. It will also help HMRC to reduce what it calls avoidable mistakes – simple errors that affect the amount of tax collected. The latest statistics1 show that these mistakes cost the Exchequer £8.5 billion in unpaid taxes during 2018-19, and the government hopes the improved accuracy of new digital tax 26 July 2021
keep and submit digitally through MTD-compatible software include: •Y our business name, address and VAT registration number •A ny VAT accounting schemes you use •T he VAT on goods and services you supply, for example everything you sell, lease, transfer or hire out (supplies made) •T he VAT on goods and services you receive, for example everything you buy, lease, rent or hire (supplies received) •A ny adjustments you make to a return •T he ‘time of supply’ and ‘value of supply’ (value excluding VAT) for everything you buy and sell •T he rate of VAT charged on goods and services you supply •R everse charge transactions – where you record the VAT on both the sale price and the
purchase price of goods and services you buy • Your total daily gross takings, if you use a retail scheme • Items you can reclaim VAT on if you use the Flat Rate Scheme. You also need to keep digital copies of documents that cover multiple transactions made on behalf of your business by: • Volunteers for charity fundraising • A third-party business • Employees for expenses in petty cash. If you’re a sole trader or already self-assess your income tax, you must keep digital records of all your business income and expenses, to be submitted through MTD-compatible software every three months. All your transactions must be added to your digital records. Invoices must be kept for a minimum of six years, but these can still be stored in paper format if preferred. At the end of each financial year, you will also be able to submit any personal income and reliefs before you make a final declaration. This includes bank and building society interest, student loan repayments, dividends, and pension contributions. This system will replace the current self-assessment tax return. Any tax owed will then need to be paid by 31 January the following year. What software do I need? Many people already use software to keep their business records, but you should check whether the software you use is MTDcompatible. If it is not, or if you currently rely on paper records, you should upgrade your systems and processes. MTD-compatible software integrates with HMRC systems to send your financial data directly using an Application Programming Interface (API).
Making Tax Digital: a timeline 1 April 2019: MTD initiative was introduced for all VAT-registered businesses with a taxable turnover above £85,000 (the VAT threshold). A six-month exception was made for ‘more complex’ businesses such as trusts and not-for-profit organisations October 2019 More complex VATregistered businesses are required to comply with MTD April 2022 MTD will apply to all VAT-registered businesses, regardless of taxable turnover April 2023 MTD will apply to all self-assessment income taxpayers, unincorporated businesses, and landlords with a total income above £10,000 a year. HMRC doesn’t have its own software, or endorse or recommend any products, but it does provide a list of MTD-compatible software at www.tax.service.gov.uk/ making-tax-digital-software. Most of the 500+ programmes listed require a paid subscription, although there are some free options.
1 www.gov.uk/government/statistics/measuring-tax-gaps
