What is Making Tax Digital?

By Lizzie Davey

18 Nov 2019

What is Making Tax Digital?

Let’s face it, tax is one of the most complicated parts of running a business. Each year, we go through the mind-numbing process of handing over a percentage of our earnings to the government and then repeat it again and again.

For employed people, it’s not such a headache as their employer siphons off their tax money before it hits their bank account. For sole traders and business owners, it’s slightly (read: a lot) more complex.

But, in a bold vision to help self-employed people and business owners stay on top of their affairs, the government is “making tax digital” over the next couple of years.

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What is Making Tax Digital?

So what is this “making tax digital” initiative?

Essentially, it’s HMRC’s bid to go paperless.

It will mean that companies and self-employed individuals will have to keep digital records of their incomings and outgoings and use specialist software to complete their tax returns.

Currently, filing a tax return can be done through a paper form or an online form via HMRC’s government gateway portal. However, keeping paper records and even filling out the online tax return won’t meet tax legislation requirements in the future.

Instead, companies and sole traders will be required to use Making Tax Digital (MTD)-compatible software to submit their figures.

HMRC hopes that this will improve the accuracy in calculations, avoid pesky transposition errors, and reduce the amount of tax that disappears due to these completely avoidable errors.

Making Tax Digital for VAT

If you’re keeping up with MTD developments, you’ll be aware that VAT-registered businesses are already required to keep and preserve their VAT records digitally.

To do this, they must send VAT returns to HMRC using MTD-compatible software (which we’ll talk more about in a moment).

The Making Tax Digital timeline

So how long have you got before you need to be punching your numbers into compatible software? While it seems like the goalposts keep changing on this, there are two things we know for certain:

- Most VAT-registered companies with a taxable turnover above the VAT threshold of £85,000 were required to start following the MTD initiative on the 1st April 2019. Enrolment for more complex businesses was deferred to 1st October 2019.

- From 2021 at the earliest, MTD for Income Tax and Corporation Tax will come into force for all businesses. Although, it’s worth noting that self-employed people and landlords can already sign up for MTD voluntarily instead of filing Self Assessment returns.

How to register for Making Tax Digital

First things first, determine whether your business needs to abide by the MTD initiative right now.

At the moment, it’s just VAT-registered companies with a taxable turnover over £85,000 that are required to handle their VAT returns this way.

Before registering for MTD, you will need to have compatible software in place. Once you’ve found the right software, you can sign up to the MTD initiative on the government’s website here.

Making Tax Digital compatible software

Perhaps the biggest change in the way businesses pay tax through the MTD initiative is that everyone will need to use compliant software to track their figures.

If you haven’t used accounting software before and have been consistently filing paper tax returns, this can be a major change. This is why it’s particularly important to research the different types of software solutions that are available.

You can run a search here to find all the available and compatible options. If you’re not already using accounting software, start by looking at our review page to get a feel for what’s out there.

Are you ready to Make Tax Digital?

Whether we’re fans of it or not, the MTD initiative is happening and businesses will need to start getting compliant over the next couple of years.

If you’re a VAT-registered company with a taxable turnover above £85,000, you should have already started using compliant software and filing your VAT returns digitally through it.

If you’re self-employed or a non-VAT registered business owner, there’s still time to get yourself sorted.

Like with any new process, the MTD legislation will undoubtedly cause a few headaches as it gets started. And, we’re willing to bet there’ll be a number of teething problems along the way.

But, once you’re set up with a compliant software package and running all your figures through that, you might find that the MTD initiative makes calculating and paying tax easier than ever. It’s one of those things where only time will tell.