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Making Tax Digital: what small businesses and the self-employed need to know

5-minute read

Making Tax Digital: what small businesses and the self-employed need to know
Sam Bromley

Sam Bromley

28 January 2020

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The first phase of Making Tax Digital for business came into force on 1 April 2019, with further transitions scheduled beyond 2020 – here’s what you need to know about this HMRC initiative, including Making Tax Digital software.

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  • Is public liability insurance tax deductible?

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What is Making Tax Digital?

HMRC's Making Tax Digital plans are all part of going paperless, moving the UK's self-employed towards digital tax returns. Making Tax Digital for business involves keeping digital records and using accounting software to complete tax returns. Eventually, keeping paper records won't meet the requirements of tax legislation.

HMRC say that Making Tax Digital is an important part of the government's plans to "make it easier for individuals and businesses to get their tax right and keep on top of their affairs."

They introduced the personal tax account in 2015, which they hoped would make it easier for people to manage their tax affairs, using a digital tax account.

HMRC are phasing in Making Tax Digital gradually. Making Tax Digital for VAT started from 1 April 2019, affecting VAT-registered businesses with a taxable turnover above the VAT threshold of £85,000.

Eventually the tax authority will introduce Making Tax Digital for Income Tax and Corporation Tax, and extend Making Tax Digital to all VAT-registered businesses. The 2019 Spring Statement confirmed that this would be delayed until at least 2021, however, to allow for Brexit delivery.

Making Tax Digital: timeline

The government originally wanted to phase Making Tax Digital in completely between 2018 and 2021. But after consultation with the industry, the first stage only becomes compulsory for VAT-registered businesses from April 2019.

Here's the current making tax digital timetable:

  • April 2019: VAT-registered businesses with a taxable turnover above the VAT threshold of £85,000 need to keep digital records and submit digital VAT returns using compatible software (some 'more complex' businesses* were given a six-month deferral)
  • October 2019: more complex businesses who were deferred need to comply with Making Tax Digital
  • 2021: (at the earliest) HMRC will implement Making Tax Digital for Income Tax and Corporation Tax, and possibly extend to all VAT-registered businesses (self-employed people and landlords can currently sign up for the Income Tax pilot, instead of filing Self Assessment returns)

*'more complex' businesses include trusts, 'not for profit' organisations that are not set up as a company, VAT divisions, VAT groups, those public sector entities required to provide additional information on their VAT return (such as government departments and NHS Trusts), local authorities, public corporations, traders based overseas, those required to make payments on account and annual accounting scheme users.

Making Tax Digital for business

Making Tax Digital only affects VAT-registered businesses – but eventually, all businesses will have to comply. Here's what the different phases mean for businesses across the UK.

Making Tax Digital for VAT

VAT-registered businesses with taxable turnover above the VAT registration threshold (£85,000 currently) now need to keep digital records and send digital VAT returns. For lots of businesses, this means from accounting periods starting on or after the 1 April 2019 Making Tax Digital deadline.

If your business has a taxable turnover below the VAT threshold, you can still sign up to Making Tax Digital voluntarily. HMRC encourages this, claiming the software will help you "better understand how your business is performing."

HMRC say the digital records you need to keep include:

  • business name and contact details
  • VAT number and details of any schemes used
  • VAT on supplies made and received
  • adjustments to returns
  • time of supply (tax point)
  • rate of VAT charged on supplies made
  • reverse charge transactions (if your software doesn't record them, you need to record them twice as a supply made and a supply received)
  • daily gross takings (DGT) if you use a retail scheme
  • purchases of assets you can reclaim tax on if you use the Flat Rate Scheme
  • value of sales made and total output tax on Gold Accounting Scheme purchases (if applicable)
  • documents covering multiple supplies made or received on behalf of your business (by volunteers, third party businesses or employees)

You should use compatible software to submit your returns (see examples of compatible software below). This will pull information from your digital records, which need to be preserved for up to six years.

You can use spreadsheets to calculate or summarise VAT transactions and work out what information you need to send to HMRC. But ultimately you'll need to use compatible software to send that information. You might also need what HMRC calls 'bridging software', which converts your records to the right format before you submit.

Making Tax Digital for individuals (Income Tax)

It's not compulsory (yet) but self-employed people and landlords can sign up for a digital tax returns pilot scheme.

The pilot lets you keep records digitally and send Income Tax updates to HMRC instead of filing a Self Assessment tax return.

HMRC say this leads to a more real-time system and lets you see how much Income Tax you might owe as you go.

Both sole traders with income from one business and landlords who rent out UK property (excluding furnished holiday lettings) can sign up.

You'll need to use compatible software to keep records and send an income and expenses summary to HMRC every three months. You'll be able to see estimates of how much tax you'll owe.

At the end of the accounting year, you'll send a final report and your tax for the year will be calculated. This is the point at which you'll claim any allowances and reliefs.

Making Tax Digital for Corporation Tax

There's not much information out there on when Making Tax Digital will come into play for Corporation Tax. HMRC are waiting to see how the VAT rollout goes first before making any decisions.

The only news we have at the moment is that the earliest it'll be introduced is 2021.

Making Tax Digital software

Businesses will need to use compatible software to send digital tax returns. Your digital records don't all have to be in one place, but HMRC wants data to flow and be exchanged digitally between applications by 31 March 2020. Until then you can use copy and paste to transfer information. We have a guide to the best accounting software for small business.

The product you use to submit digital tax returns needs to be compatible with the tax authority. HMRC has a list of compatible software – examples include Xero, Quickbooks, and Zoho.

Businesses that don’t already use accounting software are likely to face one-off and ongoing costs. There are also likely to be costs when training staff to use the software and comply with Making Tax Digital.

While the government has estimated costs of £70 a year over four years for small businesses implementing Making Tax Digital, the Institute of Chartered Accountants in England and Wales puts it at £1,250.

Are you ready for Making Tax Digital? Let us know in the comments below.

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