What's Next For Making Tax Digital?
Updated: Feb 7
Xtract Accounting, the small business Accountants for Directors and Limited Companies, explains what Making Tax Digital is, what it means for small business owners, and what direction it will take next.
As a VAT registered small business owner, you have probably come accustomed to the term Making Tax Digital (MTD) and know and understand what it’s all about.
On the other hand, a non-VAT registered small business owner may not have even heard of MTD!... That is until now!
In this blog, Xtract Accounting sets out the government’s bold vision for the UK to have “one of the most digitally advanced tax administrations in the world”, and what the future of MTD holds for your small business. Read on to find out more.
Firstly, lets recap…
What is Making Tax Digital?
MTD is a government initiative introduced with the aim to “…make it easier for individuals and businesses to get their tax right and keep on top of their affairs”. It promises to make tax administration in the UK “…more effective, more efficient and easier for taxpayers to get their tax right”.
Put simply, the government wants taxpayers to use compatible software to manage their taxes more regularly.
What is compatible software?
Well, any software that communicates directly with HMRC via their digital links. This could be as simple as using spreadsheets in conjunction with ‘bridging software’.
However, many small businesses and their accountants prefer to use more comprehensive software, software that uses data from your day-to-day business activity to build an accurate picture of your business’s tax data in real-time, making it easier to spot and correct errors that might otherwise have been overlooked. Then, once the data has been compiled, you or your accountant can submit it directly to HMRC, via a computer or smartphone.
HMRC have stated that: “…users will get the maximum benefits from MTD – fewer errors, increased productivity and better financial planning – by using dedicated MTD software”.
By using FreeAgent in conjunction with our Monthly 'FD' service with fixed monthly fees, our small business clients benefit from receiving proactive profit extraction and tax advice, based on their live accounts data.
Making Tax Digital: The story so far
The government’s gradual rollout of MTD commenced in April 2019, where all VAT-registered businesses in the UK with a turnover above the VAT threshold were required to switch to MTD-compatible software for both filing their VAT returns and storing their businesses records.
Since then, HMRC has reported that 1.4 million businesses have signed up to MTD for VAT, including 285,000 voluntary sign-ups from VAT registered businesses with turnovers below the threshold, and a staggering 6.5 million VAT returns have been successfully submitted through MTD compatible software.
It has not been without its problems though – In the initial months after April 2019, many businesses experienced VAT payment problems as HMRC switched customers to its new MTD systems.
There was anger from accountants too as they soon realised switching their clients to their new MTD Agent Services Accounts reduced their ability to manage their clients VAT affairs effectively. Soon then, MTD got an unwanted meaning – Making Tax Difficult.
Thankfully, MTD works a lot smoother these days thanks to HMRC’s continued push to improve their infrastructure and data systems.
What’s next for Making Tax Digital?
Whilst the government has continued its pledge to rollout MTD, it has been somewhat delayed by, firstly Brexit, and then Coronavirus. That said, here’s what we can expect to happen next.
Earlier this year, HMRC announced that they intend to complete the final phase of their transition to their Enterprise Tax Management Platform (ETMP). This could happen as soon as March 2021, where they will finally say farewell to the VAT Mainframe (VMF) system which has been in place since the 1970’s.
Now, you might be wondering what this has got to do with MTD… well, what this actually means is that any VAT registered businesses with taxable turnover above £85,000 (i.e. MTD mandated businesses) who have not yet signed-up to MTD, must do so now otherwise penalties could be levied from March 2021.
HMRC announced on the 5th October 2020 that in April 2021, they will decommission their online portal that allows customers to submit their VAT returns via eXtensible Markup Language (XML) software. HMRC estimate that only 3% of all VAT registered businesses use this method to submit their VAT Returns, and as such, supporting the continued use of the online portal was no longer economically viable.
All non-mandated businesses that currently use the software and do not wish to sign up to MTD yet, are being advised to register for a HMRC Business Services Account, to continue submitting their VAT returns to HMRC.
The scope for MTD for VAT will expand as all remaining VAT Registered businesses will need to comply with MTD rules for their first VAT return starting on or after 1st April 2022. This means submitting your VAT returns to HMRC via MTD compatible software and keeping your business records digitally.
If you are one of these businesses, we strongly recommend that you seek the help of an accountant now to ensure that you are ready for these changes.
The rollout of MTD for Income Tax will begin in April 2023, with all unincorporated (self-employed) businesses and landlords with annual business or property income above £10,000 being required to get onboard with MTD.
Whilst the details are not quite finalised at this time, it is thought that those effected will be required to submit four quarterly ‘Income and Expense Summaries’ throughout their accounting year (not tax year), followed by a further ‘End of Tax Year declaration’ which will replace the usual annual Self Assessment Tax Return, and must be submitted to HMRC by the 31st January following the end of the Tax Year. There is no word yet as to what deadlines will apply to the quarterly submissions.
HMRC says “…this will lead to a more real-time system, allowing the taxpayer to see how much Income Tax they owe as they go”, but also insist that the taxpayer “…will not need to submit any more information to HMRC than what they already do”.
Again, the use of MTD compatible software will be required for keeping your business records.
…But what about Corporation Tax?
Within the last few days, HMRC have released their consultation papers on MTD for Corporation Tax, and say that the proposed date to commence a voluntary pilot is April 2024, with mandating to follow from 2026 at the earliest.
It is likely to take a similar form to MTD for Income Tax, where 4 quarterly submissions and 1 annual submission will be required. It is also thought that the annual submission deadline for smaller companies will be brought into line with the current filing deadline for statutory accounts, i.e. 9 months after the accounting year end, instead of the current 12-month deadline.
…And what about more complex businesses?
At the present time, HMRC has not announced plans or consultations to include various complex businesses such as Trusts and ‘not for profit’ organisations, for example, within the scope of MTD.
Are you ready for MTD?
Here at Xtract Accounting, we already have the resources in place to help and assist our Limited Company clients through this next phase of change. If you would like to discuss how we can help your business, please Contact us.
About the Author of this Blog post…
Hi, my name is Gordon Roe and I am the Founder and Managing Director of Xtract Accounting. Having worked in an accountancy practice setting for well over a decade, I had become accustomed to the same annual routine for clients - Books in… Analyse… Queries out… Answers in… Finalise… Accounts and Tax Advice out.
Then, in 2020 I realised I could use advancements in technology and software to significantly improve the relationship between accountant and client, and at the same time, provide an insightful and real-time tax advice service. After all, that is what the modern client expects and deserves!
And so, Xtract Accounting was born…
Xtract Accounting are online accountants based in Lincolnshire, who offer proactive small business accountancy services exclusively to Directors and Owner Managed, Micro and SME Limited Companies throughout the UK.
We specialise in helping Directors Xtract more out for the work they put in!
Our monthly 'FD' service with fixed monthly fees, sees us take on the more proactive role of Finance Director for your business, and offers a plethora of benefits including:
Inclusive accounting software provided by FreeAgent,
Your very own dedicated accountant,
Regular insights into how to maximise your tax efficient (or even tax free!) income,
Jargon-free telephone and email support,
Plus, much, much more!
With Xtract Accounting, you can be sure your accounts and tax will be kept up-to-date and organised.
Find out more about us or connect with us on Social Media (below)