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

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Introduction 

UK 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). Basically, Making Tax Digital for contractors is a new way of reporting UK taxes to the authorities digitally for contracting professionals. Here, we’ll look at the Making Tax Digital roll-out in the UK. We’ll also look at where we’re heading in the future in terms of 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. Basically, 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’ll help guide them through this process. However, this guide also gives a good oversight of how the new online reporting system works in practice.

In terms of VAT registration, a UK contracting company or other business can voluntarily register for VAT, if so chooses. However, when a business’ taxable turnover exceeds the registration threshold of £85,000, it’s compulsory to be VAT registered. Once a business is VAT registered, it’ll also have to register for MTD and have to comply with the reporting requirements under this.

Initial thoughts

MTD for small businesses -what does MTD mean and what does it mean for you? 

What does Making Tax Digital mean for the UK business community and individuals? Basically, 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 show an MTD overview and 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 is 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 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, contractor MTD software is effectively an online platform, i.e., a website. Basically, 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 in place in respect of UK digital VAT reporting. Basically, Making Tax Digital VAT for small businesses is now already in place for Making Tax Digital quarterly reporting for a business’ VAT returns. Therefore, MTD for VAT rules mean that all VAT-registered businesses in the UK will need to file VAT returns using small business and contractor MTD compliant accounting software. Furthermore, a limited company contractor who’s registered for VAT must now store their financial records that relate to VAT on a digital basis.

We expect further announcements about the Making Tax Digital roll-out for Income Tax and Corporation Tax in the future. Certainly, 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. In fact, this is one of the best making tax digital software for small business and contractors. There are now many UK VAT digital reporting software providers which are available to choose from. However, FreeAgent MTD compatible software stands out for UK contractors and small business. FreeAgent themselves, also have a guide on the implementation of MTD.

Basically, FreeAgent is contractor MTD compliant software and enables the reporting of VAT for self-employed contractors. It now also enables the 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 considerations around UK MTD for small businesses 

Reporting your 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 that compatible contractor VAT digital software lets you to submit your VAT returns online with HM Revenue & Customs (HMRC). Many UK contractors choose FreeAgent for their online software and this enables FreeAgent digital VAT reporting to HMRC.

Future plans of Making Tax Digital

The tax office said previously that “other taxes” won’t come under the scope of digital reporting 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 new online reporting 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’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. As part of this, it 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 that 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 who are registered for VAT opt for digital software such as FreeAgent for submitting returns, as already highlighted earlier.

MTD for small businesses -who does it apply to? 

The Making Tax Digital shakeup outlines the changes that’ll apply to a wide range of taxpayers. Indeed, 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’ll legislate for an exemption “for taxpayers who cannot engage digitally”. Furthermore, they’ve also confirmed that the legislation will use the existing VAT online filing exemptions.

MTD for small businesses and 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 by 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 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 £50,000 per year. Basically, the turnover threshold will apply to gross income or turnover, not the profit. These individuals will have to use ITSA rules from 6th April 2026. Therefore, affected businesses will have to 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 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 new 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 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 

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”.

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 the new method of digital reporting, businesses, self-employed people, and landlords can digitally track their tax affairs in the future. Furthermore, they’ll 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 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 in respect of Making Tax Digital for VAT. As we move forward with the Making Tax Digital roll-out, this’ll extend into other areas as time progresses. Finally, if you need any Making Tax Digital advice, the best thing to do is speak to your accountant. If you enjoyed this read, please have a look at our guide to contracting for UK contractors.

Link to Contractor Advice UK group on

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Published On: January 4th, 2024 / Categories: Tax Guides /

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