What Is Making Tax Digital (MTD)
The first and second fiscal quarters faced many different challenges for many business owners. With many transactions on the local and national level shifting to digital platforms, the HMRC believes it's now time to digitalise the UK tax system. Although Making Tax Digital (MTD) already started back in April 2019, it's now speeding up to account for all companies and taxpayers in the coming months.
What does MTD do?
What the MTD aims to do is to allow business entities and organisations to observe proper taxation deadlines through digital platforms. The digital network will enable businesses to access and update their taxes in real-time without going through onsite locations. MTD requires digital accounting records to meet the tax legislations' prerequisites. MTD uses an Application Program Interface (API) platform for taxpayers to submit their personal tax affairs to the HMRC.
The development of MTD aims to allow a more seamless transaction and archiving of tax documents to prevent taxpayers from missing deadlines and incurring penalties. In the current socio-economic climate with the pandemic in mind, this digital platform is an excellent way to bypass piles of paperwork and face-to-face interactions.
What are the changes that MTD will bring?
The application of MTD to VAT started back in April 2019 and extends to all VAT-registered businesses by April 2022. Additionally, MTD for income tax will be in effect from April 2023 onwards. Although there have been talks about MTD for corporation tax in 2020, there has been no start date yet.
What will I need to observe MTD?
Business owners will need to equip themselves with the right digital software and hardware to adhere to the MTD's format. Generally, tablets and computers with internet access are your main priority. Depending on your business's size, it may be better to use smaller devices instead of full-fledged hardware upgrades to track your taxes.
The next step is to download spreadsheets and accounting software so that you can easily input your business's financials. Keep in mind that your software should connect to your bank feed and allow MTD filings. Your spreadsheets should include a list of your sales and corresponding invoices, together with an analysis and overview of your expenses. Then, it must link to HMRC to allow for quarterly reporting. Depending on the results of the first wave of submissions, the HMRC may allow you to enter quarterly figures and year-end adjustments manually.
Should I abandon analogue bookkeeping practices?
The implementation of MTD doesn't mean that you have to abandon your hardcopy record books. However, it would be helpful to have both digital and physical copies for reference while you're adjusting your business to the new format.
In fact, you may qualify for a digital exclusion opt-out if you prefer the older tax submission methods. However, you will need to present viable evidence that you are unable to follow the MTD format due to age, location, disability or conflicts with your religion. The HMRC must accept your terms before they agree for your exemption.
HMRC's different VAT and income tax deadlines aim to give enough space for business entities and organisations to adjust to the learning curve of adopting the MTD system. Also, there will be no late filing penalties for over a year while business owners and accountants adjust to MTD. However, you can still incur penalties through errors in returns in documents. Although it may be a challenging year ahead, the HMRC hopes that the digitisation of taxation processes will be a more efficient process for businesses in handling their finances.
1 to 1 Accountants is an accountancy practice in Hillingdon, Uxbridge that specialises in accounting services for small businesses. We can guide you through the advancements to current taxation laws, including the HMRC's MTD policies. Schedule an online meeting with us today to discuss how we can optimise your company's financial framework.