Time is running to changeover to the new government tax process for businesses! This post will walk tell you everything you need to know about the ‘Making Tax Digital’ change.
Although it can be difficult and time-consuming to get your tax affairs in order, particularly as the owner of a business, it’s definitely something that you should stay on top of.
What is ‘Making Tax Digital’ and why is it necessary?
Tax mistakes currently represent a huge drain, costing the Exchequer an estimated £9 billion every year. The Making Tax Digital initiative is being implemented in an attempt to reduce this figure and crack down on tax evasion across the UK.
It aims to do this by reducing mistakes such as transposition errors as well as by improving the accuracy of tax reporting generally, saving time and money to create a more streamlined process.
Making Tax Digital is designed to make the process of tax administration more straightforward for everyone involved – and if you are the boss of a business startup, you should make sure that you’re fully aware of the changes being made and that you’re fully compliant.
Is Making Tax Digital in full effect for businesses?
Making Tax Digital will not fully be in effect until October 2019, at which point the initiative will become mandatory for all businesses. Nevertheless, the process of digitising tax administration and reducing the complexity of tax returns has already begun.
In September 2017 the first draft of the planned rules under the Making Tax Digital initiative was released, as part of new legislation on tax and VAT. These are in 11 parts and state what Her Majesty’s Revenue and Customs (HMRC) can receive.
In July 2018 the rules were finalised and released to the public. By October 2018, 500,000 businesses with up-to-date tax returns and VAT became part of a pilot scheme to test the initiative. The initial conditions applied to them included:
- Not trading with the EU
- Being based exclusively in the UK
- Submitting annually
- Making their payments on account
- Using the VAT Flat Rate Scheme
Finally, the Making Tax Digital initiative was extended to customers and partnerships that traded with the EU in late 2018.
The future of Making Tax Digital for businesses
Making Tax Digital has been open to a range of different businesses as of early 2019. It’s now open to you if your business is:
- Newly registered for VAT (i.e. you have not submitted a VAT return
- Not up to date with VAT
- Trading with the EU
- Using the Flat Rate Scheme
Making Tax Digital will be compulsory for all VAT returns after 1 April 2019. When your business begins filing for the quarter with the deadline of 7 August 2019 (which is due to end on 30 June 2019) you will have to use a digital platform.
Although it is possible for not for profit organisations, public sector entities and other bodies to apply for a deferral to this start date, provided that your business has an annual turnover of £85,000 the initiative applies to you.
How to prepare your business for Making Tax Digital
Once 1 April has passed it is vital that you are aware of your business’s obligations. Government publications on Making Tax Digital advise companies to make sure that they keep digital business records, as well as:
- For VAT, submit your business returns to HMRC. Bear in mind that VAT return deadlines (including on VAT return schemes) are not changing so your usual payment schedules still apply
- For Income Tax, update your income and expenses to HMRC each quarter (or more if they request it)
You must submit your business’s VAT and Income Tax using software compatible with the initiative. If you’re unsure about which developers produce compatible software, GOV.UK provides a list to help you.
If you don’t use compatible software and ordinarily use Excel or a similar spreadsheet tool to put your business VAT returns together, you can take advantage of bridging software that will help you to make the transition.
You don’t need to prepare or keep any extra business records in order to comply with the Making Tax Digital initiative. Provided that all of your records are presented digitally (as manual records will no longer be accepted) you will be compliant.
If you are still struggling to understand if you are paying the correct taxes, here a simple guide for your tax, accounts and records. Did you find this article useful? if so, comment below, otherwise, comment below and tell us what you want to know more of.