The Making Tax Digital pilot for self-employed businesses launched in March and in a few years’ time, this new form of tax administration will be mandatory for any individual, business or non-profit organisation that has to file a tax return, although it won’t affect pensioners, those who are solely paid through payroll/PAYE, or those who have a secondary income of less than £10,000.
Are you ready?
What is Making Tax Digital?
Making Tax Digital (MTD) is the core of HMRC’s plan to become one of the most digitally advanced tax administrations in the world.
HMRC is working with commercial software providers (rather than online ‘cloud-based’ software providers) to see how they can directly link together using Application Programming Interfaces (API). This will allow your chosen software to automatically update your tax account and submit information to HMRC.
Paper accounting and the yearly tax return will become completely obsolete as the legislation comes into force in stages.
April 2019: businesses above the VAT threshold (currently £85,000) will be required to set up a digital tax account and file returns online for VAT purposes.
2020: it’s expected that the legislation will come into force for those VAT-registered businesses with turnovers less than £85,000.
At a later date, MTD will become mandatory for anyone who files a tax return and will cover income tax too.
What are the benefits of Making Tax Digital?
The government believes that MTD will make life easier for businesses and HMRC, improving efficiency, effectiveness and ease of compliance. HMRC estimates that the behavioural impacts of Making Tax Digital will contribute over £1bn to the Exchequer by 2022 to 2023.
The predicted benefits for businesses include:
- The ability to review all your tax information from your personal digital tax account
- Faster and simpler submission of your information to HMRC and online payment of any tax owed
- Increased accuracy and reduction of errors in reporting, meaning you’re more likely to only pay what you owe and are less likely to experience compliance checks and audits.
- A more up-to-date picture of your finances and the tax you owe
How can I sign up to the income tax pilot?
As part of the Making Tax Digital pilot, self-employed businesses can voluntarily use software to keep their business records digitally and send Income Tax updates to HM Revenue and Customs (HMRC), instead of filing a Self Assessment tax return. This means you’ll see an estimate of how much tax you might owe as you go, rather than waiting until the end of the tax year.
By signing up for the pilot scheme, you can ensure you’re ready for the transition well before MTD becomes compulsory.
HMRC advise any business whose year-end date is other than March 31 to consider using MTD systems far earlier. For example, a business whose year-end is June 30 will be required to file its VAT obligations through software for the quarter ending June 30 2019.
To join the pilot scheme, you will need to:
- Sign in to the Government Gateway using the Government Gateway user ID and password you got when you signed up to the Self Assessment online service (if you’re not already signed up to the online service, you need to do that first).
- Use software to keep your business records, recording income and expenses. Check if your software can send updates to HMRC; if it can’t, you need to choose these approved options.
- Use your software to send your income and expenses summary to HMRC quarterly (every 3 months).
- Send a final report to confirm your income and expenses at the end of your accounting year. If you need to claim allowances and reliefs, you can do this within that final report. You’ll be able to see a tax calculation for the year.
You can also choose to:
- Send an update to HMRC more often (this is handy if you want to see an up-to-date estimate of the tax you might owe)
- Pay your tax bill as you go, which may make budgeting easier
- Ask your accountant to send updates for you
Don’t ignore MTD until it becomes compulsory! Use this opportunity to learn about how it works and ensure you and/or your accountant are prepared for the change. Are you prepared?