As the world is turning into a digital hub, countries are shifting from traditional ways to the digital tax system. The government of the UK has declared the Making Tax Digital (MTD) initiative in the budget of 2015. Its implementation is in the process which will be completed soon. After its completion, the UK will be among the first top countries to have a fully digitalized tax system. In this blog, we’ll explore What is Making Tax Digital (MTD) and How it will affect your business?
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What is Making Tax Digital (MTD)?
This initiative will bring a revolutionary change in the overall tax system. It will help individuals and businesses to get their tax rights. In addition, it will minimize the tax revenue shortfall of almost £8bn per year (estimated by HMRC) that occurs due to the errors during tax returns. As a whole, it will make the tax system more efficient, effective, and simple for the UK taxpayers and the administration.
According to HMRC, more than 1.4 million businesses have used the new service and more than 4 million VAT returns are submitted successfully using MTD compatible software in March 2020.
MTD initiative has five basic foundations:
- To use information in a an effective way
- To submit taxes in a real-time
- Making a single financial account
- To interact digitally with the customers
- To eliminate errors through digital calculations
After discussing, “What is Making Tax Digital?” Now we’ll move towards, “How MTD will affect your business?”
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How MTD will Affect your Business?
It’ll affect businesses in the following ways:
- Now your business has to submit quarterly returns instead of annual returns
- You’ll have a complete tax accounts with a real-time display of your tax
- You’ll use accounting software suggested by HMRC
- VAT registered businesses are required to submit their VAT returns by MTD
- Businesses and self-employed earning below £10,000 or those businesses that can’t shift digitally are exempted from MTD.
Key Takeaway: If you register your business for MTD, you’d have better tax visibility and can make payments in an efficient and accurate way.
MTD for VAT:
This scheme is aimed to improve and upgrade tax-paying methods by making the tax payments quicker, easier and simpler for businesses in the UK.
If your business is earning above the £85,000 (VAT threshold), you are required to follow the rules Making Tax Digital Scheme (MTD) for your VAT returns. In this scheme, you have to maintain digital records and use software, recommended by HMRC, while submitting VAT returns. It is applicable for all VAT registered businesses after April 2022.
You may voluntarily join MTD if your income is below the VAT threshold.
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MTD for Income Tax:
Self-employed personnel and landlords need to follow MTD guidelines after 6 April 2023 if they are earning more than £10,000.
Some businesses are already providing digital records to HMRC as part of the live pilot to test MTD for income tax. Self-employed businesses and landlords have the choice to use software for maintaining digital records and to send details of income tax to HMRC. By doing this, you don’t need to file Self Assessment tax return.
MTD for Corporation Tax:
It will come into effect in 2026. Government welcomes companies and organizations to provide opinions for the MTD for corporation tax. An opportunity would be provided by the government to participate in a pilot for MTD for this tax.
Quick Sum Up:
Hopefully, now you have got the required information: What is Making Tax Digital and How it’ll affect your business? Though these changes seem daunting, they are quite easy and you’ll get into a flow after using them for a while. Many businesses are already working digitally to boost their revenue, HMRC is just pushing them up. You just need to implement the strategies provided. While digitalizing your business, you should use that software that is compatible with HMRC.
Disclaimer: It is an informational blog that contains general information about the topic. You should not consider it expert financial advice.