Making Tax Digital (MTD) has been in the works for a while now, changing the way individuals and businesses in the UK report their earnings. But what does it mean for limited companies and their directors? This blog explains all you need to know.

An overview of Making Tax Digital

Making Tax Digital, or MTD, is a government initiative to fully digitise the UK tax system. Individuals and businesses will need to keep digital records about their finances and use MTD-compatible software for things like Income Tax, VAT and Corporation Tax.

HMRC believe it’ll help simplify the process of record keeping, as well as minimise administration errors that would usually result in penalties.

What types of tax are affected by Making Tax Digital?

MTD is being rolled to various taxpayers in stages, so not all of them will affect you or your business.
 

What does Making Tax Digital mean for my limited company?

Making Tax Digital changes the way you report things to HMRC. For instance, if you’re VAT-registered it’s now a legal requirement to keep digital records and submit your VAT returns with MTD-compatible software – as opposed to sending off your return through your VAT online account.

When it comes to MTD for Corporation Tax, it’s likely to be a fairly similar process.

Under the requirements for MTD for Corporation Tax you’ll:

• Keep digital records using special software that works with HMRC’s Making Tax Digital (MTD) system
• Send updates to HMRC using that software
• Use the same software to make changes, claim tax relief, and submit a final return to HMRC so they can work out how much Corporation Tax you owe

This new system will eventually replace the current method of filing for Corporation Tax, which involves a CT600 form and detailed accounts in a special format called iXBRL.

So, in a nutshell, instead of filing one big tax return once a year, you’ll keep digital records and send smaller updates more often using MTD-compatible software.

When is MTD Corporation Tax expected to roll out?

There’s no current start date to mark the roll out of MTD for Corporation Tax. HMRC may begin a voluntary pilot for businesses before it becomes mandatory, but it really depends how early it’s introduced.

Will any business be exempt from MTD for Corporation Tax?

Exemptions for MTD Corporation Tax are minimal, but there are some businesses that may qualify for exemption. For instance, taxpayers who are already exempt from other phases of MTD, like MTD for VAT, as well as anyone who falls within the digital exclusion criteria – but you will need to apply for this exemption.

Public bodies are also likely to be exempt from MTD Corporation Tax but it’s important to note this could all change – no transition date has been set yet.
 

How do I know if software is MTD-compatible?

GOV.UK has a list of software compatible with MTD, although a provider being compliant for MTD VAT doesn’t automatically mean they also meet the requirements for MTD Income Tax, and so on. Always check software is compliant before signing up to any long-term commitments – or before receiving any penalties.

Everything limited company directors need to know about MTD

If you’re a director and the only income you get is from your salary and dividends, then you won’t qualify for MTD Income Tax. You’ll just carry on reporting your income as normal – usually by submitting Self Assessment tax returns.

What about directors with property or sole trader income?

If you also get property or sole trader income outside of your limited company, and this income qualifies for MTD IT, you can use MTD Income Tax to report all your income – but you won’t need to include your salary, dividends, or investment income in your quarterly updates.

You’ll use your quarterly updates to report any property or sole trader income which qualifies. When you submit your final quarterly update and make any adjustments, you’ll then report the details of any extra income streams as part of your annual tax return before submitting everything together.

You can add this other income by either:

• Using MTD-compliant software that handles the full tax return
• Or by using upgraded Self Assessment software that works with MTD

You can use different software for different parts. For instance, one tool for your quarterly updates and another for your year-end report. You’ll also be able to use different tools for different types of income, such as UK property income or overseas income.

 
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