Making Tax Digital: What you need to know

The British government’s tax modernisation and digitisation programme continues apace, with Making Tax Digital (MTD) becoming mandatory for many small businesses from either April 2022 or 2023.

Current MTD rules require UK businesses with a turnover above the VAT registration threshold (£85,000) to keep their records digitally, and provide their VAT return information to HMRC through MTD-compatible software for VAT periods starting on or after 1 April 2019.

However, MTD for VAT for all VAT-registered businesses will be compulsory from 1 April 2022 - although smaller businesses can sign up voluntarily before this date.

Time to act

The MTD pilot scheme for income tax self-assessment (ITSA) taxpayers has also launched – with mandatory MTD for ITSA from April 2023. With the MTD for corporation tax pilot scheduled for April 2024 (becoming mandatory in April 2026) and a new MTD penalty regime coming in from next year, businesses need to start giving some thought to MTD now if they have not already done so.

As Ben Dyer, CEO of specialist software company Powered Now, advises: “Every trade business should be considering their plans for MTD”, whether that’s turning to a specialist software company, or talking to the accountant who submits their HMRC returns “as soon as possible”.

“My strongest advice would simply be this – don’t get caught out at the last minute, and plan early so that your finances are in check throughout the year,” Dyer adds.

MTD for VAT, and digital records

Before signing up to Making Tax Digital for VAT, HMRC instructs that VAT-registered businesses need either a compatible software package that allows a business to keep digital records and submit VAT returns (with digital links between the records and quarterly returns), or ‘bridging software’ that connects non-compatible software (like spreadsheets) to HMRC’s online systems.

For VAT-registered businesses that have not already signed up to MTD, the requirement to keep VAT records digitally and provide VAT returns to HMRC using MTD-compatible software, will apply from their first VAT period starting on or after 1 April 2022.

The following records need to be kept digitally:

• business name, address and VAT registration number
• any VAT accounting schemes used
• the VAT on goods and services supplied, e.g. everything a business sells, leases, transfers or hires out (supplies made)
• the VAT on goods and services received, e.g. everything a business buys, leases, rents or hires (supplies received)
• any adjustments made to a return
• the ‘time of supply’ (tax point) and ‘value of supply’ (value excluding VAT) for everything bought and sold
• the rate of VAT charged on goods and services supplied
• reverse charge transactions (where VAT on both the sale price and the purchase price of goods and services bought are recorded)
• your total daily gross takings if a retail scheme is used
• items you can reclaim VAT on for businesses using the Flat Rate Scheme
• total sales, and the VAT on those sales, if businesses trade in gold and use the Gold Accounting Scheme.

A business must add all its transactions to its digital records, although HMRC says scanning paper records like invoices or receipts is not necessary.

Businesses also need to keep digital copies of documents that cover multiple transactions made on a business’s behalf (by volunteers for charity fundraising, by third-party businesses, and/or by employees for expenses in petty cash).

MTD for ITSA

MTD for ITSA will be compulsory for accounting periods starting on or after 6 April 2023 for self-employed individuals and landlords with taxable turnover above £10,000 from annual business or property income – although UK-resident sole traders with income from one business only, or landlords who rent out UK property (or both) can voluntarily sign up to the pilot now.

Those eligible to sign up will need to:

• keep digital business records
• get compatible software
• send business income and expenses updates
• finalise one’s business income
• submit a final declaration instead of a self-assessment tax return.

The web portal for sign-up will differ depending on if the taxpayer signs up to MTD for ITSA, or if their accountant signs up on their behalf.