What is Making Tax Digital?

The government’s Making Tax Digital strategy looks to there being a new, digital way of working that will include all taxpayers reporting their income and expenses via digital software, in a more timely manner.

Ultimately, HMRC are looking for this to lead to the more frequent payment of tax, in line with the increased reporting requirements, for all self-employed and small businesses owners. They are looking at the development of a single digital account and single taxpayer record.

Which businesses does Making Tax Digital affect now?

The next round of Making Tax Digital for VAT comes into force from 1 April 2022. This requires VAT registered businesses with turnover under £85,000 to be compliant.

This means that Making Tax Digital for VAT will apply to all VAT-registered businesses from this date, including those voluntarily registered for VAT, meaning you must keep VAT records digitally and send returns using Making Tax Digital compatible software.

There is room to apply to HMRC for an exemption if it is not reasonable or practical for you to use computers, software or the internet.

The requirement is that all VAT return information must be supplied digitally from your accounting software directly into HMRC’s MTD portal. Excel spreadsheets can continue to be used, but only if the accompanying MTD bridging software is fully digitised to submit VAT returns.

When will Making Tax Digital affect me or my business?

The government’s Making Tax Digital programme launched in 2019 – by 2024 there will be an expectation on most businesses and self-employed individuals to keep digital records and use software to submit their returns.

All VAT registered businesses need to be Making Tax Digital compliant from 1 April 2022. Self-employed businesses and landlords with annual business or property income above £10,000 will need to follow the rules for Making Tax Digital for Income Tax from their next accounting period starting on or after 6 April 2024.

Will Making Tax Digital apply to landlords?

Landlords with annual business or property income above £10,000 will need to follow the rules for Making Tax Digital for Income Tax from their next accounting period starting on or after 6 April 2024.

This means that any type of landlords, including but-to-let and furnished holiday lets, with an annual turnover above £10,000 will be required to keep income and expense records digitally and submit their tax return directly to HMRC using compatible software.

There are simple and cost-effective packages such as Sage Accounting and FreeAgent available now that can help with this transition to digital accounting.

Is there software that can help with Making Tax Digital?

If you are a small business and do not already have an internal system to log your accounting records, you can use off-the-shelf software such as Xero, QuickBooks, Sage Accounting or FreeAgent.

These cloud accounting software solutions are user friendly and will enable you to keep your finances in control. They streamline the recording and reporting process by letting you take photos of invoices/receipts and uploading them directly to synch with your business bank account – all via an app on your phone or tablet.

Cloud accounting solutions use bank feeds to import live data, this reduces the time needed to undertake manual data entry. They are easy to use on the go and can improve the cashflow of your business.  This can, in turn help in making crucial business decisions as there will be a better picture of finances with the real time information.

What are the implications for not making my tax digital?

HMRC’s ambitions for a real-time compliance-based system place data firmly at the heart of its strategy and the message is clear: businesses will need to ensure their data is accurate and their compliance documented.

The government is introducing a new penalty regime for late submission of tax returns and late payment of tax.

Late-submission penalties

There will be new penalties for late submission of tax returns.

Taxpayers will not be charged an automatic financial penalty if they fail to meet a submission obligation. Instead, they will incur a penalty point for each missed submission obligation and a financial penalty will only be levied once the taxpayer reaches a penalty points threshold. The threshold varies depending on frequency of the obligation (monthly, quarterly, annual) and the penalty has been set at £200.

The points system will be applied separately to each tax, and it will be possible to appeal against penalty points as they are incurred. The points will expire after a period of full compliance of up to 24 months.

Late-payment penalties

There will be new penalties for late payment of tax and harmonising interest rules across different taxes.

Two late-payment penalties may apply. A first penalty of 2% of the unpaid tax is charged on tax unpaid 15 days after the due date, increasing to 4% if the tax remains unpaid 30 days from the due date.

An additional penalty at an annualised penalty rate of 4% will accrue on a daily basis on tax remaining unpaid after 30 days.

The penalties will not be levied if the taxpayer has contacted HMRC to arrange time to pay by the trigger date for the penalty, so long as the taxpayer ultimately agrees the time-to-pay arrangement.

The reforms come into effect:

VAT – periods starting on or after 1 April 2022.

MTD ITSA – accounting periods beginning on or after 6 April 2024.

Other ITSA taxpayers – accounting periods beginning on or after 6 April 2024.

We would recommend that as part of your forward planning for your business that you look to start keeping digital records and providing updates to HMRC electronically.

Across the Stephenson Smart offices, we have accountants who have specialist knowledge and accreditations to support our clients with their Making Tax Digital obligations.

Please get in touch if you would like to discuss how you can prepare for these changes.