A Guide to Making Tax Digital for Small Businesses

A Guide to Making Tax Digital for Small Businesses

A lot of things we used to do physically, like shopping, filing tax returns, and booking travels, are now done online. As part of efforts to shift everything in the UK from paper-based work, the HMRC introduced Making Tax Digital (MTD), a new digital tax initiative, on April 1, 2019.

This means small businesses will no longer be required to type VAT figures and transactions into the HMRC website. They will submit these returns digitally through software compatible with the system.

What is Making Tax Digital?

The MTD initiative by the HMRC involves getting the self-employed and small businesses to complete their digital tax records and returns in a paperless way. It aims to make it easier for individuals and enterprises to submit their returns seamlessly.

HMRC ultimately wants to revolutionize the UK tax system to join the list of top advanced tax administrations globally. MTD is making this dream come true.

Initially, the government was reportedly losing billions of pounds each year from unpaid taxes and submission errors. Small businesses, on the other hand, spent significant time and energy during tax submissions.

The UK government believes tax digitization will play a major role in solving these issues.

To comply with MTD, businesses must send relevant data to the government using software integrated with the HMRC's Application Programming Interface (API).

However, the government will not provide software for this initiative. Small business owners are responsible for finding the right software solution.

Deadlines for Making Tax Digital

HMRC has gradually introduced Making Tax Digital since April 1, 2019. Initially, it was in effect for VAT-registered businesses with a taxable return above £85,000. Here are the key deadlines for MTD:

  • October 2019: Complex businesses were put on hold in the initial plan to comply with MTD.
  • April 2022: MTD became mandatory for all businesses with a turnover of less than £85,000.
  • April 2023: Compulsory for landlords and self-employed individuals with income above £10,000 annually.
  • 2026: MTD for Corporation Tax may be applicable upon confirmation by the HMRC.

Making Tax Digital for Small VAT Businesses

According to the deadlines, it is mandatory for small businesses to file their tax returns digitally. Failure to comply can result in penalties. It is essential to plan early and find suitable software before the deadline.

Businesses with a taxable turnover above £85,000 need to maintain digital records and submit returns to the government. For most businesses, the digital tax submission period started on April 1, 2019.

If your business’s turnover is below the threshold, you can voluntarily begin using MTD. This will help you familiarize yourself with the software and monitor your business performance.

Making Tax Digital Software

All businesses need compatible software to submit their digital tax returns. HMRC recommends linking all your records, regardless of the system used, after April 1, 2021. This can be done through emailing records, downloading/uploading files, and using spreadsheets.

HMRC lists several compatible software options like Zoho, Xero, and QuickBooks, which are easily accessible on their website.

Benefits of Making Tax Digital

Making Tax Digital comes with several benefits, including:

  1. Very Efficient: Using software to file tax returns is quicker and easier since everything is automated.
  2. Environmentally Friendly: This initiative reduces paper usage, making it more sustainable.
  3. Future-proofing: It prepares your business for the inevitable future of tax digitization.

Handling tax affairs can be challenging, but this new strategy simplifies the process and reduces time spent on submissions. Early preparation will ensure smooth digital tax submissions.