What is Making Tax Digital?Making Tax Digital (MTD) is a HMRC initiative that aims to change & modernize the UK tax system by 2020. Each year the Exchequer loses around £9bn in avoidable mistakes and MTD promises to reduce that number significantly. To do so, the government will digitize the UK tax system by eliminating paper work and ensuring that all tax data is stored and sent via MTD-compatible software that has a direct link to HMRC. MTD for VAT will begin on 1 April 2019, which means all VAT registered businesses above the VAT threshold of £85, 000 will have to keep digital records and should submit VAT returns using compatible software. Making Tax Digital for other taxes, such as income tax and corporation tax is on the way but has been postponed until 2020, at the earliest. After MTD is implemented, businesses will submit the tax information to HMRC on a quarterly basis through compatible software. It will automatically update your records and store all your company data in one place. This new tax system will end the era of annual tax filing and marks the beginning of making the UK the most technically advanced tax system in the world.
Who will be impacted from Making Tax Digital?
- April 2019 - All businesses above the VAT threshold of £85, 000 will be required to keep digital records and file their VAT returns online by using MTD-compliant software.
- April 2020 – MTD for income tax & corporation tax are not yet finalized and still put on hold. It is confirmed that it will not become mandatory before April 2020.
- 2020 – Those that complete self-assessment tax returns such as self-employed, partnership firms, trusts and landlords do not have a fixed date for mandatory income digital tax reporting.
You can read also: Making Tax Digital for VAT – Is Your Software Up to Date
Why Making Tax Digital (MTD)?MTD will benefit businesses due to the following reasons:
- Easier - MTD-compatible software helps businesses to record and file their tax returns online.
- Efficient – Automating the process is fast and efficient as it helps save the valuable time of businesses, accountants and HMRC.
- Effective – MTD means more accurate tax recording; reduce errors, miscalculations and fraud.
- Accessibility – By keeping your tax records digitally, you can check your tax records and HMRC information from anywhere, at any time.
- Real time data – MTD will stop you waiting until the end of the year to know how much tax you must pay to HMRC.
- Digital records – By storing records in the cloud, you can easily interact with HMRC on any issue at any time.
- Single account – You can see all your financial information in one place.
How will Making Tax Digital (MTD) change the way things are done?This is the most important question being asked by businesses and accountants ahead of the changes to the law. Agents are currently advising and motivating their clients to move their tax records online as it will increase the efficiency & accuracy of their VAT returns as well as being MTD-ready.
- Digital record keeping - Businesses & individuals who file taxes with HMRC will be required to use digital tools instead of paper forms. Failure to keep digital records for MTD for VAT will result in penalties up to £3000. However, spreadsheets can be used with the correct bridging software.
- Quarterly data – It is not only the end of paper work but it also marks the end of annual tax returns. From April 2019, you are not able to file returns annually. You need to update tax information to HMRC every 3 months.