What is Making Tax Digital: Overview of Compliance and Thresholds

Posted by Maria Katrina dela Cruz
Oct 22, 2021
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What is Making Tax Digital? Also known as MTD, the UK government introduced the approach to bring their vision of modernising the tax system to life. 

what is making tax digital?
What is Making Tax Digital? 

Aside from the eventual aim of going paperless, HMRC launched MTD to ‘make it easier both for individuals and small businesses to keep their tax right and be on top of their affairs.’ What started as the Making Tax Easier movement has now evolved into Making Tax Digital, which comprehensively encourages the full digitalisation of tax processes.

The published report of HMRC uncovered that there is £3.7 billion worth of tax gaps caused by errors in tax calculations, tax returns, and the like. This is a case in point for the MTD initiative —curbing these kinds of mistakes, in turn, reduces tax gaps valued in millions when collated.

Digital filing and record-keeping harness the power of Application Programming Interfaces (API) that provides access to an amplitude of tools to make sure business owners stay on top of their tax affairs. 

How will Making Tax Digital work? 

In simple terms, MTD means having a compatible software to oversee tax matters with HMRC. Currently, the HMRC online tax return services are withdrawn every time an entity signs up to MTD.

Read Next: Guide to Prepare Your Business for Making Tax Digital

Businesses are required to digitise their accounting records and maintain them accordingly. A functional compatible software uses HMRC’s API to forward the necessary information to the office. This [software] is needed for submitting updates and tax returns.

What to expect next 

So far, the MTD campaign is only imposed on VAT-registered businesses and organisations. At a later date, all companies are about to comply with it. 

Here are a few points of compliance to take note of:

MTD for VAT 

MTD is applied to VAT-registered businesses with a taxable turnover above £85,000 starting April 2019. However, those below the VAT threshold have the option to voluntarily join the MTD for VAT service. Come April 2022, they will all be required to follow the service. 

The compliance remains as long as you’re operational. It only ceases the moment you deregister for VAT. 

MTD for Income Tax 

Making Tax Digital for income tax is for self-employed businesses and landlords with a yearly/ property income above £10,000, starting from 6 April 2024. 

Same as mentioned above, entities can use the software at their own discretion to maintain their records digitally and send their income tax updates to the governing office instead of settling a Self Assessment tax return. But those who aren’t are required to do so starting April 2024.

In fact, organisations that are part of the live pilot continues with the practice until today. 

MTD for Corporate Tax 

MTD for Corporate tax is the next step of the project, but is still in its incubation phase. They are still waiting for the result of VAT implementation before making a decision to push through or not. 

The British government ran a consultation and published a report from the collective feedback of affected groups, professional bodies, and industry experts regarding the design of the future Making Tax Digital for corporate tax. When (and if) it gets a go signal, the rollout will commence in 2026. They will also host a pilot community for businesses regarding the MTD for corporation tax, like the first two. 

Making Tax Digital best software 

A compatible software is the lifeblood of MTD. Without it, the initiative will feeble and its framework will fall frail. 

Yes, spreadsheets can be used in conjunction with the bridging software, but for a more comprehensive record tracking, accurate tax data, minimal errors, and information prompts on overlooked data, they use a software that works best for their needs. In addition, it [software] converts your records to the right format prior to sending as well. 

After compiling the data, you can forward the document to the HMRC directly from any device you’re working on. It also preserves the data you may need for the next 6 years. 

The HMRC endorses an array of software providers, which all underwent their recognition process. Some of them offer free versions, but the majority entail payment first.

Some of the HMRC recommended software are:

  • Xero
  • QuickBooks (Intuit)
  • Sage Business Cloud Accounting
  • Oracle NetSuite
  • FreeAgent
  • Zoho
  • FreshBooks Cloud Accounting
  • SAP for SAP Business One

For the full list of software for MTD for VAT, you may visit this page.

What does making tax digital mean for accountants 

Accountants are about to have a bigger role during the migration to the MTD service. For one, you will need to brief your client/s about this initiative: how it will impact their financial reporting, and the timeline they have to make the transition. 

Another point is their savviness to technology. If they’re not technologically inclined, or are not/ do not have any experience in using an accounting software, it’s a guarantee that they’ll be asking you a lot of questions from signing up to choosing the right software for MTD. You’re gonna need to instruct them how to go about it. 

Aside from your clients, your staff should also be at par with the coming changes. They can use a training to meet an influx of client inquiries as soon as everything is implemented. 

All accounting firms are facing or about to face this immense migration of the tax system. Grab this opportunity to reshape your services, and at some point, update your pricing structure to better serve your clients and upskill your team. 

Now that you know what is making tax digital, you also learned how this project is crucial in the UK’s vision of modernising their tax system. Amid uncertainties attributable to the challenges of businesses in shifting to MTD, the government carefully studies how the transition will be an easier one for them, hence, pushing the movement forward. 

Need a dependable team to back you up for the MTD shift? We’re here to help. Our team of accountants are abreast with the latest regulations in the UK, and are fully adept in using the features of the top cloud accounting software in the market. 

Get your copy of our latest whitepaper Premium Solutions for UK Accounting Firms to learn how we can be of better help to your finance and accounting functions, or contact us today to know more.

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