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.