Introduction –MTD for small businesses
Making Tax Digital (MTD) is fairly new on the scene for UK businesses. MTD for small businesses, which includes UK limited company contractors, sets out how to report taxes to HM Revenue & Customs (HMRC). Key to note, Making Tax Digital is a new way of reporting UK taxes to the authorities digitally. Here, we will look at Making Tax Digital roll-out and where we are heading in the future. In 2023, we are now already well underway with Making Tax Digital for VAT. Therefore, the UK VAT digital reporting for UK businesses for VAT submission is already here now.
Making Tax Digital for VAT started in April 2019. From April 2022, new legislation was in place for VAT going digital and applies to all VAT-registered businesses regardless of turnover. Therefore, almost all business now use UK VAT digital reporting to file their VAT returns.
Please note that a business can voluntarily register for VAT if so chooses. However, when a business’ taxable turnover exceeds the registration threshold of £85,000, it is compulsory to be VAT registered.
MTD for small businesses -what does MTD mean and what does it mean for you?
What does Making Tax Digital mean? UK MTD is a government initiative that sets out a bold vision for a digital tax system. This idea is to “make it easier for each individual and business to get tax right and keep on top of their affairs”.
MTD for small businesses -what is Making Tax Digital?
UK MTD is about digitally advanced tax administrations that make tax reporting more effective. Furthermore, it is about digital tax solutions and making reporting taxes more efficient and easier for taxpayers. This is through the implementation of a fully digital tax system which uses digital links to transfer or exchange data between software programs. To clarify, digital software is effectively an online platform, i.e., a website. Please note that this allows you to maintain your business records and file documents online with the tax office.
Making Tax Digital for VAT and the system’s roll-out is now well underway. Most important, MTD (UK) for VAT is now already in place. This means that all VAT-registered businesses in the UK will need to file VAT returns using MTD-compliant software. Furthermore, a limited company contractor who is registered for VAT has to now store their financial records that relate to VAT on a digital basis.
FreeAgent is a popular online accounting software package and this is one of the best making tax digital software for small business. To explain further, this is ideal for UK contractors and almost all small businesses.
We expect further announcements about the Making Tax Digital roll-out for Income Tax and Corporation Tax in the future. Please note that software providers like FreeAgent are actively in talks with HMRC to help implement MTD. As part of this, the aim is to simplify the shift for small businesses.
UK MTD for small businesses -other considerations
What to expect?
If your business is VAT registered, you should already have an MTD tax digital software solution and use UK VAT digital reporting. This will allow real time VAT reporting (UK) which means the MTD-compatible software will allow you to submit your VAT returns online with HM Revenue & Customs (HMRC). Many UK contractors choose FreeAgent for their MTD (UK) software and this enables FreeAgent digital VAT reporting to HMRC.
Future plans of MTD for small businesses
The tax office said previously that “other taxes” will not come under the scope of MTD until at least 2021. However, every small business owner and individual taxpayer now has access to a digital account. Moreover, they can use this to check their records and manage their details with HMRC. As the roll-out of MTD gathers pace, you should see the future significant changes to the way that you manage and report your business taxes:
- Through your digital account as a UK contractor, you can see a complete full picture of your business tax affairs. In addition, you will also be able to manage all of your tax liabilities simultaneously in the same place.
- Key to note, HMRC will collect and process information that affects tax as close to real-time as possible. As part of this, it should prevent any tax due or repayments owed from building up.
- As an extra note, you will no longer need to wait until the end of the tax year to know how much tax you have to pay.
For those that still wish to use a spreadsheet to record their business transactions there is an option called bridging software. This enables the user to upload their filled VAT spreadsheet and the software will submit the VAT return to HMRC. It is notable however, that most of those with a contractor limited company opt for digital software such as FreeAgent, as already highlighted earlier.
UK MTD for small businesses -who does it apply to?
The MTD shakeup outlines the changes that will apply to a wide range of taxpayers. Please note that this includes most businesses and landlords. In addition, it also includes self-employed people as well as individual taxpayers.
However, HMRC has confirmed that it will legislate for an exemption “for taxpayers who cannot engage digitally”. Furthermore, they have also confirmed that the legislation will use the existing VAT online filing exemptions.
MTD for small businesses and the planned timeline -how will MTD come in?
The story so far
As MTD for small businesses rolls out, several changes will come in. Notably, based on the information released by HMRC in July 2017, here is a rough Making Tax Digital timeline of the Making Tax Digital roll-out developments that are most relevant to business owners:
- April 2022 -digital for VAT.
It is now mandatory for all UK VAT-registered businesses to file their VAT returns by MTD-compliant software. Therefore, they need a digital platform such as FreeAgent to do this. In addition, the previous ways of filing are no longer available.
In the future
- April 2024 -this was the planned introduction date for Making Tax Digital for Income Tax Self Assessment (ITSA). However, this has now been moved forward following government consultations.
- April 2026 -initially, MTD for Income Tax (ITSA) will apply to self-employed business owners and unincorporated landlords with total business or property income above £50,000 per year. Notably, the turnover threshold will apply to gross income or turnover, not the profit. These individuals will have to use MTD for Income Tax rules from 6th April 2026. Therefore, affected businesses will need to use MTD-compliant digital software to submit quarterly summaries/returns of their business’s income and expenses:
- Maintain records of business income and expenses in a digital format.
- For each type of income (self-employed business or property), submit quarterly updates of your business income and expenses to HMRC.
- Finalise your business income with submission of an end of period statement (EOPS) for each source of income, along with a final declaration.
- April 2027 -those with an income of more than £30,000 will have to follow the MTD for Income Tax (ITSA) rules from this date. Partnerships will be required to join at a date yet to be announced.
- The future -MTD for Corporation Tax.
- The future -the digital reporting of what is now the UK Self-Assessment tax return.
MTD for small businesses -reporting
A new way of reporting to HMRC
The move to a more digital tax system should come as welcome news to the many taxpayers who already choose to report much of their information to the HMRC system online.
The number of returns that are currently submitted online
The shift to a digital service will help to iron out some of the issues that can make the current method of reporting information to HMRC frustrating for business owners. In particular, MTD promises to “modernise the tax system” and “make it more effective, more efficient and easier for customers to comply”.
UK MTD for small businesses -the end of the income tax Self-Assessment tax return
One of the most significant implications for a UK contractor or small business owner is the removal of the annual tax return. In its place will be MTD tax returns, initially starting with sole traders and unincorporated landlords as mentioned earlier.
Under MTD, businesses, self-employed people, and landlords can digitally track their tax affairs in the future. Furthermore, they will also be able to update HMRC at least quarterly via third-party software, or more often if they prefer. In addition, HMRC has said that this will not involve completing a full tax return four times a year. Therefore, it will simply mean you will provide more regular updates online.
This is now due to come in on 6 April 2024 for any person who is self-employed or who is a landlord and has income (not profits) of over £10,000 per annum. The MTD rules will be coming in for certain partnerships in 2025.
As a final note on MTD for small businesses, in previous times, many contractors regularly updated their spreadsheets each quarter. Nowadays, most have switched to digital records and reporting in respect of Making Tax Digital for VAT. As we move forward with the Making Tax Digital roll-out, this will extend into other areas as time progresses.
Link to Contractor Advice UK group on