Everything you need to know about Making Tax Digital

Recently, the UK government have introduced new regulations around how tax records are to be kept and submitted. The rules, known as Making Tax Digital, are designed to digitise the tax system and make online accounting simpler and more accurate. It therefore asks businesses to make potentially costly considerations to ensure their infrastructure is up to standard. 

Below, we will examine everything there is to know about Making Tax Digital – what it aims to do, who is affected, its requirements, and how you can comply. 


What is Making Tax Digital? 

Making Tax Digital is a piece of legislation that’s part of the government’s wider Tax Administration Strategy taking place between 2020-30. Its aims are to: 

  • Use software to allow customers to integrate tax management with different business processes. 
  • Make it easier for both businesses and individuals to get their tax right. 
  • Encourage the digitisation of UK businesses so they can experience productivity gains. 

The hope is that the use of digital records and dedicated software will make tax returns more accurate. Submitting tax updates directly to HMRC should also add to overall efficiency. Under Making Tax Digital, businesses will send tax information to HMRC at least four times a year instead of once. This makes it more likely that tax submissions reflect a business’s position in real-time. 

As experienced accountants, we know just how important precise bookkeeping is for business success. 

Who needs to sign up? 

All UK businesses were automatically signed up for Making Tax Digital for VAT from April 2022, regardless of their turnover. Previously, the government stated that only companies that turned over more than £85,000 per year would have to comply. This development means any new businesses will immediately be beholden to making tax digital rules. 

The requirements of Making Tax Digital can also apply to landlords and self-employed business owners. However, this is only necessary from 6th April 2026 for those with a yearly business/property income of more than £50,000. Or, if this annual value exceeds £30,000 by 2027. 

Landlords and self-employed individuals such as sole traders have the option of signing up voluntarily, although only if you meet the following criteria: 

  • You’re a UK resident. 
  • You can prove your returns and payments are up to date. 
  • You’re registered for Self Assessment. 
  • Your rentable properties are based in the UK. 


Requirements of Making Tax Digital for businesses 

Businesses signed up to Making Tax Digital are required to implement a number of measures to make the switch to digital tax. Chief among these is the need to keep digital records which cover: 

  • The tax point (time of supply) 
  • The net value of the supply excluding any VAT. 
  • Business information, including the owner’s full name, the business’s name and address, and how many employees it has. 
  • The rate of VAT being charged. 
  • Your VAT registration number, along with details of any VAT accounting schemes used. 

These records must be generated and returns submitted from VAT periods started on or after 1st April 2019. 

The other requirement is that your business uses software that is compatible with HMRC’s systems. This allows VAT records and returns to be sent quickly via digital means such as email. Compatible software includes a wide range of products, notably Xero. You can check you have the right software on the government website. 


Complying with Making Tax Digital 

Since April 2022, Making Tax Digital has been a legal requirement for VAT registered businesses. As such, you must follow the rules if you exceed the £85,000 threshold. There is the possibility that penalties will be issued to businesses that fail to keep digital tax records or submit returns using incompatible software. 

If you’re faced with changing your internal operations to accommodate Making Tax Digital, perhaps because you’ve grown to the size where you have to register for VAT, the first step is to make a plan. This is because transferring physical accounts to digital can be complicated and time consuming.  

If you already keep records in a digital storage space, you must still submit the information using Making Tax Digital compatible software. The requirements for this software are: 

  • It can prepare VAT returns using digital records. 
  • It can store and maintain specified digital records. 
  • It is able to communicate directly with HMRC via a digital link. 

Notably, businesses that use spreadsheets to make VAT submission calculations can keep this approach. This is made possible through the bridging feature, which allows for the VAT spreadsheet to simply be uploaded onto a device and submitted from there. 

Registering for Making tax Digital 

As mentioned previously, you will need to instruct HMRC to sign your business up to Making Tax Digital. They will then move you VAT account from the old HMRC system over to the new one associated with Making Tax Digital. This can be done through the government website by submitting: 

  • Your business email address. 
  • VAT registration number. 
  • A copy of you latest VAT return. 
  • Your government gateway user ID and password (if you have them). These can be created during the process if needed. 

Many people who submit self-assessment tax returns are choosing to sign up for Making Tax Digital for Income Tax ahead of the 2026 deadline. This is simply because it helps them be prepared and to avoid getting caught out. A chartered accountants can take care of the compliance and registration process if you’re operating as an individual. 


Experienced business accountants Liverpool 

As chartered accountants based in Birkenhead, we’ve helped make accounting stress free for a huge range of local businesses in Liverpool and across Merseyside. Switching over to Making Tax Digital, although sometimes difficult to implement, helps you become more efficient and grow faster. As such, if you’re looking for accountants for small business, you really shouldn’t look any further. Our team is familiar with a range of business taxation, from corporation tax to VAT and PAYE. Contact us today. 

What happens during a tax investigation?

As a business, facing a HMRC tax enquiry or investigation can seem daunting. In addition to the stress of the investigation itself, you are then required to execute the day to day running of your business as though everything is normal. HMRC simply wants to crack down on individuals and organisations that are paying less tax than they should be. Nevertheless, you can be the subject of an investigation even if you have nothing to hide.  

In this blog, we’ll guide you through everything that happens during a tax investigation.


Types of tax investigation 

There are two types of tax investigation that can be carried out by HMRC, each with differing levels of severity. These are: 

Aspect enquiry 

An investigation targeted at a specific area of the business’s accounts. For example, when there are inconsistencies in a section of a recent tax return. 

Full enquiry 

Here, a HMRC investigator will review all your business records. If you are a limited company, this will result in scrutiny of company directors’ tax affairs, along with the affairs the business itself. A full-scale investigation is typically initiated when HMRC believes there is significant risk of a tax error. 


It should be noted that both an aspect enquiry and a full enquiry can be initiated randomly. As the name suggests, in this case the investigation can affect any business at any time. Oftentimes, HMRC will not consider the nature of your accounts or if the business has triggered an alert before launching a random enquiry. 


What can trigger a tax investigation? 

While some checks are completely random, there can be a variety of legitimate reasons why HMRC would want to conduct a tax investigation. This includes: 

  • Late filing of a tax return or tax payment. 
  • Errors need to be corrected on a tax return. 
  • The business is reporting expenses that are abnormally high for its industry. 
  • HMRC has received a tip-off. 
  • Tax returns are inconsistent. 
  • The business is operating in a high-risk industry. 

Although many believe that tax investigations are exclusively concerned with business income tax. In reality, many different types of taxes can be the subject of an investigation, such as: 

  • Capital gains tax 
  • Insurance premium tax 
  • Landfill tax 
  • Climate change levy 
  • Corporation tax  
  • VAT 
  • Construction industry scheme 


Process of a HMRC tax investigation 

As the national tax authority in the UK, HMRC has the right to check a business’s affair at any time. If your business is selected for a tax investigation, the first thing that will happen is you’ll receive an official communication from HMRC. This will be either a letter or a phone call to confirm the existence of the investigation, as well as what their focus is. 

During the course of the tax investigation, HMRC will then ask various questions to find out what they need to know. An investigator can go back up to 20 years in business records during a full enquiry. This is reduced to 6 years when carelessness in a certain area is suspected, and 4 years for random enquiries. Their actions will be tailored to the areas the investigation is targeting, which can include: 

  • The company tax return. 
  • Your Self Assessment tax return (if present). 
  • Any PAYE records and returns. 
  • Tax accounts and tax calculations. 

HMRC investigators can visit business premises to inspect assets, view computers, question staff, and remove records for examination. Depending on the severity of the investigation, the entire process can take anywhere from 3-6 months for a random check, to 18 months for a full tax investigation. 

If you use an accounting service for statutory accounts or management accounts, HMRC could make first contact with this party instead. If this is the case, your accountant should inform you of the investigation immediately. 


Once HMRC are satisfied they’ve found what they need, the end of the investigation will be marked by a decision notice or the agreement of a contract settlement. The former outlines HMRC’s final assessment and will include any penalties. Decision notices are typically issued in the form of a letter. 

On the other hand, a contract settlement is a legal agreement between the taxpayer and HMRC. In it, you must agree to pay any tax owed along with any penalties set out. As part of the contract, HMRC agrees not to forcibly recover the money by using its powers. 


Get tax investigation insurance 

The best way to protect your business against a tax investigation is to make sure your accounts are in order. For this, you need expert bookkeeping and accounting services such as those provided by Jan McDermott. Being investigated by HMRC can be a time-consuming and costly process. We offer tax investigation insurance as a solution, so you’re protected from any costs incurred during a HMRC investigation. Contact us today to get started. 


Does a sole trader need to register for VAT?

Registering for Value Added Tax (VAT) is a decision most owners will be faced with at some point in the lifetime of their business. This requires that VAT apply to goods and services that the business provides, although only in certain circumstances. Do these same conditions apply to sole traders as a type of business? 

In this blog, we’ll discuss some of the basics around VAT registration and if it’s a requirement for sole traders in the UK. 


VAT registering explained 

Registering your business for VAT is a process whereby it is listed with the government as an active agent in sales and production. This means that you will have to charge the right amount of tax on any goods and services sold by the business. You will also be able to reclaim any VAT spent on company purchases. 

Although your business is the entity charging VAT to consumers, you won’t see any additional revenue. Instead, this tax is collected on behalf of HMRC and so gets transferred directly.  

The benefit of being registered for VAT comes from the ability to reclaim on business expenses. This applies to sales invoices and any items bought for operational purposes. If you aren’t registered, you will still have to pay VAT for business account purchases. Except now you don’t have the option of claiming anything back. 


How the UK defines sole traders 

The UK government defines a sole trader as anyone who runs their business as an individual and completes the work themselves. You’ll also be required to register as a sole trader if any of the following is true: 

  • Your self-employed earnings exceeded £1,000 between April 6th 2022 and April 5th 2023. 
  • You need to access claim tax-free childcare by providing proof that you’re self-employed. 
  • You’re seeking to make voluntary Class 2 National Insurance payments to support benefits qualifications. 

As a sole trader, you are then entitled to keep all your business profits (after tax). From here however, sole traders operate in a similar way to larger business models. They have a responsibility to: 

  • Keep business records and a comprehensive record of any expenses. 
  • Report and pay taxes to HMRC by sending a self-assessment tax return each year. 
  • Budget for and pay income tax on any profits, as well as class 2 and 4 National Insurance.


When to register for VAT 

UK businesses and organisations must register for VAT once their turnover reaches a certain threshold. This concerns the total value of relevant business acquisitions and taxable supplies. The threshold at the time of writing in 2023 is £85,000, where it will be fixed until 31st March 2024. Failure to register when you are required to do so will result in penalties. 

Any taxable individual (someone registered or required to be registered) whose supplies have gone over the threshold in the past 12 months is liable to register for VAT. It’s also a requirement if, at any time, the value of your taxable supplies is predicted to go over the registration threshold in the next 30 days. 

Liability also applies to businesses that make distance sales to Northern Ireland, or those based in Northern Ireland and making acquisitions. Although, it should be noted that the distance sale of excise goods in the UK can only be done by businesses that are registered for VAT. This must be done regardless of the value of the goods. 

Of course, there is the option to choose to voluntarily register for VAT. There are a few reasons you might want to do this. 

Pros of voluntary VAT registration 

For anyone starting out in business ownership or small businesses generally, voluntarily registering for VAT can: 

  • Save hassle down the line as, once the business exceeds the £85,000 turnover threshold, it will become necessary regardless. Registering for VAT while trying to pilot a growing business can be challenging. 
  • Reclaim a portion of VAT on any goods and services purchased by the business. 
  • Encourage the business to keep accurate and up-to-date records. This can make it easier for leaders to gain business insights and strategise more effectively. 

Cons of voluntary VAT registration 

Some aspects of VAT registration to be wary of include: 

  • Charging VAT typically means that the tax is included in prices. This leads the business’ products and services to appear more expensive to the end user than they are meant to be. 
  • Once a business is registered for VAT, it will be subject to certain housekeeping responsibilities. Among these are filing for VAT returns, keeping VAT invoice, receipts, and VAT accounting records. All of which can be a significant drain on time and resources, especially for SMEs. 

If you are still unsure if registering for VAT is the right move for your business, or if you want support in the process, it’s recommended to use the services of VAT specialist accountants. 


Registering for VAT as a sole trader 

The rules for sole trader VAT registration are largely similar to those for more traditional public and private limited companies. In other words, if you’re a sole trader that makes over the threshold of taxable supplies you will need to register for VAT. 

As mentioned above, there are certain benefits to being VAT registered that can make it an appealing option for sole traders. For example, selling to businesses that are themselves registered for VAT allows them to reclaim the VAT you charge, allowing your prices to remain competitive. 

On the other hand, you should weigh up whether giving your customers a higher price is worth it. It could test loyalties and cause some to stop buying. Typically, as sole traders tend to operate on a smaller scale than other companies, they will have the choice of whether or not to register for VAT. To help, an accountant for sole trader operations is often employed. 


Experienced VAT accountants  

If you choose to register for VAT as a sole trader, we’ll be there to support you. The biggest challenge when it comes to VAT registration is often figuring out if it’s the best decision from a business standpoint, and the process itself. Jan McDermott Chartered Accountants offer a range of services to businesses of all sizes. Our experienced team will be happy to help with any bookkeeping you require as part of VAT registration and more. Get started and contact us today.