A Comprehensive Guide to Making Tax Digital for Businesses
Updated: Jan 7
Making Tax Digital (MTD) is changing the way UK businesses, accountants and bookkeepers do their taxes. Find out what this means for you and learn how Xero can help you become MTD-compliant.
What is Making Tax Digital?
Making Tax Digital is an HMRC initiative designed to make sure the UK tax system is effective, efficient and easier for taxpayers.
Making Tax Digital for VAT makes it mandatory for VAT-registered businesses above the £85k threshold to keep records and submit VAT returns digitally using HMRC-recognised MTD software like Xero.
The Government confirmed in July that Making Tax Digital will be extended to include all VAT-registered businesses from April 2022 and for income tax from April 2023.
Here are the Making Tax Digital deadlines:
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 (read more below)
October 2019: more complex businesses who were deferred need to comply with Making Tax Digital
April 2022: MTD will be compulsory for businesses with a turnover below the £85,000 VAT threshold
April 2023: MTD will apply to taxpayers who file Income Tax Self Assessments for business or property income of more than £10,000 a year
'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.
How Making Tax Digital affects Business?
At the moment Making Tax Digital only affects VAT-registered businesses – but eventually, all businesses will have to comply.
Here's how to register for Making Tax Digital, making sure you’re complying with the right phases.
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."
In August 2020, the government announced that businesses below the VAT registration threshold would have to use Making Tax Digital starting in April 2022.
HMRC says 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 Sole Traders
Making Tax Digital for Income Tax will launch properly in April 2023 for self-employed people and landlords who make over £10,000 annually.
So while it's not compulsory (yet), if you fill in a Self Assessment tax return, you 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. The government estimates that so far, around 30 per cent of businesses and landlords have signed up voluntarily.
HMRC says it will lead to a more real-time system, which lets you see how much Income Tax you owe as you go. Signing up will also give you time to get used to the process before the 2023 deadline.
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 about when (and if) Making Tax Digital will be introduced for Corporation Tax. HMRC is waiting to see how the full VAT rollout goes first before making any decisions.
Making Tax Digital for Landlords
If you make more than £10,000 a year from your rental properties, you will need to sign up for Making Tax Digital by April 2023.
At the moment, you can join the scheme voluntarily, should you wish to. Skymark Financial is here to help you.