What is Making Tax Digital?

According to the gov.uk website, “Making Tax Digital is a key part of the government’s plans to make it easier for individuals and businesses to get their tax right and keep on top of their affairs.”

With Making Tax Digital (MTD), HMRC aims to become one of the most digitally advanced tax administrators in the world.

What’s happened so far?

Since April 2019, VAT registered businesses above the threshold of £85,000 have been required to submit their VAT returns via a “functional compatible software” and store VAT accounting records digitally.

February 2023 Update

The final phase came into effect in November 2022, with all VAT registered businesses now required to be using MTD compliant software and keep digital records. Paper returns and old online VAT accounts can no longer be used.

What’s next?

The next stage for MTD begins on 1^st April 2022, when use of MTD for VAT accounting will be mandatory for all VAT registered businesses, including those that sit below the £85,000 VAT threshold.

February 2023 Update

The April 2024 deadline applying to taxpayers filing income tax self assessments on an annual income over £50,000 has been extended to April 2026.

By April 2027, those with annual incomes between £30-£50,000 who are self employed will also need to submit their income tax self assessments digitally.

What does this mean for businesses not already using MTD?

From 1^st April 2022, it will no longer be possible for businesses to submit their VAT returns manually via the HMRC website. As a result, all businesses must submit VAT returns for their first full period from 1^st April via a “functional compatible software”.

How can you prepare for MTD?

Figure out when your business will be impacted by MTD

If your business is VAT registered, you will need to implement MTD from 1^st April 2022. From that date, you will need to use MTD for your first full tax period, and all tax periods after that.

Not only will you need to submit your tax returns digitally, but you will also need to store some of your VAT information digitally as a legal requirement. This is known as digital record keeping.

If you have separate systems for VAT information storage and your VAT returns, you will need to digitally link these in order to be MTD compliant.

Whether you’ll be using MTD from 1^st April, or at a later date, it’s best to start preparing now.

Your first step for preparing for the change is to look at whether you have “functional compatible software” in place. If you have an existing accounting system in place, get in touch with your software supplier or partner if you’re unsure.

If you’re not using any software solutions at all, and your VAT and accounting processes are still manual and paper-based, you’ll need to look into your options for implementing a digital accounting solution.

Aside from ensuring compliance with regulations, implementing MTD compliant software can provide businesses with a range of additional benefits that make life and accounting so much easier.

Best-in-class cloud accounting platform, Sage Intacct, helps businesses in ways including:

Remote Business Management – keep on track of all your business financials via any internet connected device.
Improved Cash Flow – automatically generate invoices, getting you paid faster.
Faster Reconciliations – transactions are imported and categorised automatically, allowing you to reconcile at the touch of a button in just seconds.

If your business is an SME, we may have the perfect fit for your business’ needs! Discover Sage Intacct and Sage Intacct Starter Edition.

Familiarise yourself with MTD exemptions

There are some circumstances where businesses may be exempt from having to use MTD for VAT.

Businesses can only claim these exemptions if they fall under the category of being “digitally exempt” under HMRC’s procedures.

Businesses that may be exempt include:

Those where religious beliefs are incompatible with the requirements
Those where age, disability, or location mean it’s not practical to use digital tools
Those where there are insolvency proceedings

If any of these characteristics apply to you, get in touch with HMRC via their VAT helpline on 0300 200 3701 (0300 200 3719 for textphone).

Establish which processes need to be adapted

Ahead of the switch, you need to make sure you evaluate all your processes around generating your VAT return.

Here are some things to consider:

How do you raise sales invoices?
How do you capture expenses?
Is your accounting system cash or invoice-based?
Are there any other processes that are paper-based or taken care of separately to your accounting system?

Bear in mind that while you can still keep paper-based accounts if you want to, but some of the invoice-level data will need to be transferred to your MTD-compatible software.

Implement “functional compatible software”

The key reason for the requirement of “functional compatible software” within your business for MTD is that your software must be able to communicate with HMRC’s systems to enable you to submit your VAT returns.

If you have an existing accounting solution in place at your business, it’s best to speak to your partner or vendor for advice and guidance on whether it is MTD-ready, and find out what you need to do to take steps to prepare your business if it’s not.

Want to discuss your software options?

If you currently have a Sage solution and you’re looking for a new partner, or would like to discuss updating your solution, please get in touch via the form below.