Last year, HMRC introduced Making Tax Digital, or MTD.
Making Tax Digital was launched to bring our tax system into the digital age, with the idea being that businesses should be able to supply real time information via software to HMRC, to make taxes more transparent and simpler.
You can read more about this in our blog below, but we’ve also prepared this video to explain all of the details:
The first part of the Making Tax Digital roll out was in April 2019. Since then, most VAT-registered businesses have submitted their VAT returns via MTD compliant software.
So far, HMRC claim it’s been a huge success and have recently published a number of case studies showing how many businesses have actually found that using the software has saved a lot of time and made their lives easier.
Now, the software itself isn’t HMRC software – it is predominantly Cloud based software, for example Xero and QuickBooks. We’ve been using these for a number of years and agree with HMRC that they do, indeed, save a lot of time and make lives easier for business owners.
And the fact we already used them made it pretty simple for our clients in terms of switching to Making Tax Digital, because we just carried on using the software we were using anyway.
Of course, for a lot of businesses transitioning into this software has been a lot of work.
Since 2019, over 1.4 million businesses have been using MTD for their VAT returns. And, even though some smaller businesses didn’t have to do so, HMRC have found that about 30% of them chose to do so voluntarily.
In July 2020, HMRC and the Treasury announced the next steps for MTD and also their 10-year plan for the tax system.
The key dates for MTD are:
There isn’t any date yet for Limited Companies who are not VAT-registered. The April 2023 is for businesses paying Income Tax, ie sole traders and partnerships.
The Government will be consulting later this year on how the system will look for Corporation Tax. There’s no set date yet, but the plan is that companies will have to submit Corporation Tax via MTD as well in the future.
What are the benefits?
The idea of Making Tax Digital is that it doesn’t actually add any tax cost and, at the moment, it doesn’t change when tax is paid.
It is purely getting towards real time information.
Up to date information
One of the benefits that HMRC are claiming is that, if it had existed already prior to Coronavirus, it would have taken away a lot of the ill feeling over newly self-employed people being not applicable for any grants.
The Self-Employed Income Support Scheme, which was worth up to £14,070 in grants, was only given to self-employed people who were trading before 5 April 2019.
This was because tax returns are only submitted once per year and the last submitted return was for the year to 5 April 2019. HMRC didn’t want any fraudulent claims from people who suddenly decided to be self-employed just to get the grant. Therefore, they used the last return submitted as evidence.
If quarterly returns were submitted, this would have allowed a lot more newly self-employed people to have correctly and properly claimed the grant.
The real time information will also help with benefits and other adjustments to income tax – this is exactly how it works for employees where HMRC receives information every month from employers on all payments to employees.
Easier tax returns
And it will allow HMRC to pre-populate parts of your tax return. They already do this for your salary and some interest payments, ie anything where they already have the records. MTD will make this even easier.
What are the costs?
Most of the software needed does cost money. At the moment, many landlords and small businesses will use paper or Excel, but these won’t meet the MTD requirements.
Yes – the software does save time. But, if your business only has income of £10,000, the need to pay £20-£30 per month for software might seem a bit excessive.
Will it change tax payments?
As part of their 10-year strategy, the Treasury will look at whether they can change the frequency of tax payments.
At the moment, VAT is calculated and paid quarterly, but Income Tax and Corporation Tax are on an annual basis.
There is a feeling that this is unfair when employees on PAYE are taxed as soon as they earn the income and pay it monthly. Therefore, why should companies and self-employed people get a year’s grace before they pay?
It can also lead to cashflow issues when that payment does have to be paid, because not everybody budgets for it.
So, HMRC and the Treasury would like to move to quarterly tax returns and quarterly tax payments.
There will be a consultation about that later in the year.
Overall, there are some interesting developments there. Making Tax Digital was announced a number of years ago, and the plan always was to bring all the taxes into it, but it had been delayed a couple of times.
And I think most of us saw Coronavirus as a reason to delay it a little bit more, but now that’s not the case.
If you do need any help getting ready for MTD, just let us know. We’re Xero Gold Partners and QuickBooks Platinum Elite ProAdvisors, which is a fancy way of saying we’re pretty good at cloud software!
And we moved well over 100 clients to MTD last year with no hassle at all for any of them.
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