Making Tax Digital & MTD for small businesses & uk vat digital reporting

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Introduction 

UK Making Tax Digital (MTD) is relatively new for UK businesses. MTD for small businesses, which includes UK limited company contractors, sets out how to report taxes to HM Revenue & Customs (HMRC). Making Tax Digital for contractors is a new way of digitally reporting UK taxes to the authorities for contracting professionals. Here, we’ll look at the Making Tax Digital roll-out in the UK. We’ll also consider where we’re heading regarding new MTD (UK) plans. In 2024, we’re already well underway with Making Tax Digital for VAT. Therefore, the UK VAT digital reporting for UK businesses for VAT submission is already here.

Making Tax Digital for VAT started in April 2019. If we consider is MTD compulsory, from April 2022, new legislation was put in place for VAT going digital. This applies to all VAT-registered businesses, regardless of turnover. Therefore, almost all businesses now use UK VAT digital reporting to file their VAT returns. In this guide, we’ll research how MTD for contractors works when you run your own company. What’s more, we’ll consider how the new digital reporting for contractors’ system operates for your limited company. When we consider MTD, contractors will often seek the advice of their contractor accountant, who will guide them through this process. However, this guide provides a good overview of how the new online reporting system works.

Regarding VAT registration, a UK contracting company or other business can voluntarily register for VAT if it so chooses. However, when a business’ taxable turnover exceeds the registration threshold of £90,000 (£85,000 up to 31 March 2024), it’s compulsory to register for VAT. Once a business is VAT registered, it must register for MTD and comply with the reporting requirements.

Initial thoughts

MTD for small businesses -what does MTD mean? 

What does Making Tax Digital mean for the UK business community and individuals? UK MTD for limited companies, businesses and individuals is a government initiative that sets out a bold vision for a digital tax system. This page from HMRC shows an MTD overview. The aim and basic idea of the Making Tax Digital roll-out 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’s Making Tax Digital? 

The new online reporting system is about digitally advanced tax administrations that make tax reporting more effective. Furthermore, it’s about digital tax solutions and making tax reporting more efficient and easier for taxpayers. This is through implementing a fully digital tax system that uses digital links to transfer or exchange data between software programs. To clarify, contractor MTD software is an online platform, i.e., a website. This lets you maintain your business records and file documents online with the tax office.

Making Tax Digital for VAT and the system’s roll-out regarding UK digital VAT reporting are now in place. Making Tax Digital VAT for small businesses is already in place for Making Tax Digital quarterly reporting for a business’ VAT returns. Therefore, MTD for VAT rules means all VAT-registered businesses in the UK must file VAT returns using small business and contractor MTD-compliant accounting software. Furthermore, a limited company contractor registered for VAT must now store their financial records relating to VAT digitally.

We expect further announcements about the Making Tax Digital roll-out for Income Tax and Corporation Tax in the future. Indeed, software providers like FreeAgent are actively in talks with HMRC to help implement new digital reporting for these taxes. As part of this, the aim is to simplify the shift for small businesses.

FreeAgent

FreeAgent is a popular online accounting contractor VAT digital software option. It’s one of the best Making Tax Digital software for small businesses and contractors. There are now many UK VAT digital reporting software providers available. However, FreeAgent MTD-compatible software stands out for UK contractors and small businesses. FreeAgent themselves have a guide on the implementation of MTD.

FreeAgent is contractor MTD-compliant software that enables the reporting of VAT for self-employed contractors. What’s more, it now allows reporting of other taxes to HMRC. In addition, FreeAgent Making Tax Digital small business software works very well for UK contractors and almost all small businesses. Indeed, this MTD small business software has an ideal platform to use for your VAT (and PAYE) digital reporting with HMRC. When you use the software, you can file your FreeAgent VAT return directly with HMRC via the software each quarter.

Other aspects of UK MTD for small businesses 

Report VAT online 

If your business is VAT registered, you should already have an MTD tax (UK) digital software solution and use UK VAT digital reporting. This allows real-time VAT reporting (UK), which means compatible contractor VAT digital software lets you submit your VAT returns online with HM Revenue & Customs (HMRC). Many UK contractors choose FreeAgent for their online software which enables FreeAgent digital VAT reporting to HMRC.

What are Making Tax Digital plans for the future?

The tax office said previously “other taxes” won’t come under the scope of digital reporting until at least 2021. However, every small business owner and individual taxpayer can now access a digital account. Moreover, they can use this to check their records and manage their details with HMRC. As the roll-out of new online reporting gathers pace, you should see the future significant changes to the way you manage and report your business taxes:

  • Through your digital account as a UK contractor, you can see a complete picture of your business tax affairs. In addition, you’ll be able to manage all your tax liabilities simultaneously in the same place.
  • HMRC will collect and process information that affects tax as close to real-time as possible. This should prevent any tax due or repayments owed from building up.
  • As an extra note, you’ll no longer need to wait until the end of the tax year to know how much tax you must pay.

Bridging software

For those who still wish to use a spreadsheet to record their business transactions, there’s an option called bridging software. This uses `Digital Links’ and enables the user to upload their filled VAT spreadsheet, and the software will submit the VAT return to HMRC. However, most of those with a contractor limited company registered for VAT opt for digital software such as FreeAgent for submitting returns, as already highlighted earlier.

MTD for small businesses -who it applies to 

The Making Tax Digital shakeup outlines the changes that will apply to a wide range of taxpayers. This includes most businesses, landlords, self-employed people, and individual taxpayers.

However, HMRC has confirmed it’ll legislate for an exemption “for taxpayers who cannot engage digitally”. Furthermore, they’ve confirmed the legislation will use the existing VAT online filing exemptions.

MTD for small businesses & what’s the planned timeline? 

The story so far 

As the new digital system rolls out, several changes will come in. What’s more, based on the information released by HMRC in July 2017, below is a rough Making Tax Digital timeline of the Making Tax Digital roll-out developments which are most relevant to business owners:

  • April 2022 -digital for VAT.

It’s now mandatory for all UK VAT-registered businesses to comply with UK MTD VAT and file their VAT returns with compliant software. Therefore, they require a digital platform such as FreeAgent to do this. In addition, the previous filing methods are no longer available.

In future

  • April 2024 -this was the planned introduction date for digital reporting for Income Tax Self Assessment (ITSA). However, MTD for ITSA 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 £30,000 per year. Basically, the turnover threshold will apply to gross income or turnover, not profit. These individuals must use ITSA rules from 6th April 2026. Therefore, affected businesses must use 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 by submitting an end-of-period statement (EOPS) for each source of income, along with a final declaration.

The government announced the outcome of the review into the impact of Making Tax Digital (MTD) for Income Tax Self Assessment (ITSA) on small businesses, which includes maintaining the current MTD threshold at £30,000 and designing changes to simplify and improve the system. The changes will take effect from April 2026. The government will also ensure taxpayers who join MTD from 6 April 2024 are subject to the government’s new penalty regime for the late filing of tax returns and late payment of tax.

  • April 2027 -those with an income of more than £30,000 must follow the new ITSA rules from this date. Partnerships are required to join at a date yet to be announced.
  • The future -MTD for Corporation Tax.
  • The future and the digital tax return shakeup -the digital for income tax reporting of what’s now the UK Self-Assessment tax return.

MTD for small businesses reporting 

New way to report to HMRC 

The move to a more digital tax system should come as welcome news to taxpayers who already report much of their information to the HMRC system online.

Number of returns currently submitted online 

The shift to a digital service will help iron out some issues that frustrate business owners when reporting information to HMRC. MTD promises to “modernise the tax system” and “make it more effective, more efficient, and easier for customers to comply.”

MTD for small businesses -end of 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 are MTD tax returns, initially starting with sole traders and unincorporated landlords, as mentioned earlier.

Under the new method of digital reporting, businesses, self-employed people, and landlords can digitally track their tax affairs in the future. Furthermore, they can update HMRC quarterly via third-party software or more often. In addition, HMRC has said this won’t involve completing a full tax return four times a year. Therefore, it’ll simply mean you provide more regular updates online.

Final thoughts 

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 use contractor VAT digital software. Indeed, they use this for their reporting regarding Making Tax Digital for VAT. As we move forward with the Making Tax Digital roll-out, that’ll extend into other areas as time progresses. Finally, if you need any advice on Making Tax Digital, the best thing to do is speak to your accountant. If you enjoyed this article, please read our guide to contracting for UK contractors.

Link to Contractor Advice UK group on

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Published On: April 6th, 2024 / Categories: Tax Guides /

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