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Making Tax Digital is one of the latest UK government drives to “reduce the tax gap” between what businesses generate and what the Treasury collects in revenues. Some key deadlines are coming up with owners and directors need to be aware of. Below, our financial planners in Padiham explain the key things you need to know about Making Tax Digital and offer ideas to plan accordingly. We hope this is useful to you and please contact us if you want to discuss your financial plan with an experienced financial planner in Padiham.
Key tax rules for businesses: a summary
Making Tax Digital was originally announced at Budget 2015, formally consulted on in 2016 and began implementation of its first phase in April 2019. From here leading up to April 2022, a business needed to keep digital records and file VAT returns with HMRC if it was registered for VAT and had an annual turnover of at least £85,000 (the VAT threshold). Since April 2022, this requirement has been extended to all UK businesses registered for VAT with a taxable turnover below £85,000
This must be done using software that is compatible with Making Tax Digital (MTD). You can find a list of the software that you can use on the UK government’s website. The initiative will, hopefully, make it easier for businesses to submit their tax returns – collating and preparing for them (assuming digital records have been kept up to date).
Key upcoming dates for Making Tax Digital
From April 2024, the MTD rules will extend to self-employed businesses, partnerships and landlords with annual business or property income above £10,000. Therefore, if your business falls into this category you have a year to prepare your digital infrastructure and tax plan.
The above pertains to VAT. However, self-employed people and landlords will also eventually need to follow the rules for Making Tax Digital regarding income tax. From 6 April 2026, the rules will apply to those with income exceeding £50,000. From April 2027, the income threshold will go down to £30,000.
A pilot has been proposed for businesses to cooperate with the UK government in Making Tax Digital for Corporation Tax from 2026. However, no firm plans have been announced yet.
Preparing for Making Tax Digital
Fortunately, complying with the Making Tax Digital rules does not have to be a complex process (assuming your records are accurate!). If you have an accountant managing records for you, it may be appropriate to explore setting up a process to share these with you. If you keep your own paper-based records for bookkeeping, then it may be time to start moving these to a digital storage area. Eventually, records will need to be submitted to HMRC using MTD-compatible software. To avoid creating extra work for yourself later, consider checking that you can easily connect to HMRC’s systems via a digital link.
If you would prefer to keep calculating your VAT submission using spreadsheets, then you could continue to use this approach using a “bridging feature” on your MTD-compatible software. If you are not already registered for Making Tax Digital, then you can sign up as an individual on the UK government’s website (in approximately 3 minutes). This does not automatically enrol you for MTD VAT. It can take 73 hours to copy your account to the new MTD computer system.
Once your application is submitted, you could then sign up for an app/software which is MTD-compatible. You will likely be prompted to enter your VAT details and be guided to connect to your newly-created MTD account with HMRC (once it has been set up). Once the integration is complete, you can submit your MTD VAT return using the software.
Tax planning implications of MTD
With these big changes coming into force, it is a good idea to look at “future-proofing” your business even if your business turnover falls below the above thresholds. Certain exemptions exist for MTD based on age, disability, remoteness of location and religious beliefs. However, you will need to submit evidence to HMRC which can then assess whether or not it is practical for your business to comply.
MTD is also an opportunity to refine your tax plan and potentially keep more assets/profit for your business. Keeping better digital records, for instance, could help certain owners keep better track of their expenses – claiming more efficiently and reducing needless tax. Moreover, owners may be less likely to meet tax return deadlines (e.g. when submitting Self Assessment) and incur penalties if dedicated software is doing more of the “heavy lifting” for them.
If you are interested in digitising your business tax records, then this can also be an opportunity to review your overall tax plan and make improvements with a financial adviser. For instance, perhaps increasing employer pension contributions (as a limited company) could help you boost your retirement fund and help the business save on tax via Corporation Tax relief. Speak with one of our Burnley financial advisers to explore options like this with a specialist.
Invitation
If you are interested in starting a conversation about your own financial plan or investments, then we’d love to hear from you. Please contact us to arrange a free, no-commitment consultation with a member of our team here at Elmfield Financial Planning in Padiham, Burnley, Lancashire.
Reach us via:
T: 01282 772938
E: info@elmfieldfp.co.uk
