Making Tax Digital (MTD) has been part of the tax reporting routine for many businesses for some time. The government has made no secret of its long term tax digitisation plan, which it hopes will help to boost national productivity, and make it easier for businesses and people to pay their taxes and reduce avoidable errors and fraud. Since MTD was introduced in 2019 more than 1.4 million businesses have joined the programme, submitting over 6 million returns.
The latest stage of the MTD digitisation plan has just been announced, and although the changes will not take effect until 2022, it is important to be aware of what they are, and who they will affect.
At present, businesses above the VAT threshold of £85,000 are required to keep digital records and provide VAT returns through appropriate software. From April 2022, MTD will be extended to all VAT registered businesses whose turnover is below the VAT threshold (£85,000). A year later, from April 2023, it will apply to all taxpayers who file income tax self-assessment tax returns for business or property income over £10,000 annually.
What does this mean for small businesses?
Business owners whose turnover is below £85,000 need to start thinking ahead about how they will submit digital tax returns, as many of them may not be keeping electronic records at the moment. As your accountant or tax adviser we can give you more information about how the process works, and it is expected that the long notice period will also provide software providers with enough notice to bring a range of new products to market, including free software for businesses with simple and straightforward tax affairs.
The government has also pointed out that over 30% of smaller VAT-registered businesses, who are not yet required to use MTD, have chosen to do so voluntarily because of the wider benefits the system offers, including fewer errors in their tax returns and less time needing to be spent on this administrative process.
Making Tax Digital should help with cash flow planning and also make the process of tax compliance less burdensome, although as Ryan Pearcy, Director of Cloud-Based Accounting commented: “the back end security and management for MTD has sometimes been rather inflexible and awkward. This does not help promote the efficiency aim MTD was brought in for.”
Ryan adds: “It is also important that business are aware that the announcements do not affect the existing next stage of Making Tax Digital, which is that businesses who are already above the VAT threshold need to set up digital links between their software by April 2021. As many businesses copy and paste or re-type information this will be a key issue for them and will require them to review their processes.”