Making Tax Digital 101: a guide for businesses

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Are you confused about what’s going on with the Maxing Tax Digital (MTD) scheme?


In case you didn’t already know, MTD is the government’s plan to digitalise and streamline the UK’s tax system.


It was first announced way back in 2015, but its full rollout has been pushed back several times. Still, a few rules are already in place — and it’s essential to understand how these new processes could impact you and your business to ensure you don’t miss any deadlines (or rack up any penalty fines)…


Understanding the MTD scheme


Any business owner will know that filing taxes can be dull, often resulting in slip-ups. Unfortunately, these mistakes can end up being time-consuming and costly to fix.


The Making Tax Digital initiative aims to create a system that minimises errors and makes it easier for businesses to manage their tax responsibilities by making digital tax filing a legal requirement.


As of 1 November 2022, VAT-registered businesses can no longer use their existing VAT online accounts to send monthly or quarterly VAT returns. Instead, they’re required to start using MTD-compatible software for their VAT accounting and keep digital records with an MTD account.


The next stage of MTD will cover income tax self-assessments (ITSA) — affecting millions of self-employed individuals, business owners and landlords with incomes above £50,000.


MTD ITSA was due to come into effect in April 2024, but the government has pushed this date back to April 2026 — meaning those affected by these changes have an additional two years to prepare for the switchover (silver lining, huh?).


From April 2027, the same rules will apply to individuals with incomes between £30,000 and £50,000.


Getting used to this new process might seem like a lot of faff, but a study conducted by IFF research for HMRC on Maxing Tax Digital for VAT shows existing business participants feel more confident about filing their returns since MTD’s new rules were introduced.


Thanks to these new processes, business owners and entrepreneurs can spend less time on paperwork and more focusing on the important stuff — once they’ve put the appropriate systems in place. So, where to start?


Know your deadlines


Hopefully, if you’re a VAT-registered business, you’ve already signed up for MTD. However, if you haven’t, you’ve unfortunately missed the deadline, which was 27 March 2022.


If you’ve already signed up for MTD, you’re in luck — there aren’t any more deadlines to be aware of in the near future. Just make sure you submit those payments on time, as HMRC is also introducing a new late payments penalty system that could fine up to 4% of the outstanding amount daily.


Under the new MTD requirements, businesses will receive a ‘point’ every time they miss a VAT returns deadline. When you’ve built up a certain number of points, you’ll pay a £200 fine.


It’s also worth knowing that MTD exemptions are very rare. If you run a VAT-registered company, you’d need to apply for an exemption with a (very) good reason for being unable to file taxes digitally. Typically, exemptions are only given for age, disability, location or religious reasons.


Download compatible software


As MTD rolls out, HMRC will ask for an increasing number of digital records to be kept — including your business name, any changes to returns, the rate of VAT you charge on supplies and more.


You can still use spreadsheets to calculate or summarise VAT transactions to work out what information HMRC will need, but the MTD initiative means you’ll have to use compatible software to actually send it.


Any VAT-registered business that doesn’t use MTD-compliant software to store business records digitally and file VAT returns will be penalised by HMRC. This can include fines of up to £400 for every VAT return not submitted through compatible software.


To find the software best suited to you (and to make life a lot easier), use the HMRC software search.


Register yourself or your organisation


When you have the right software, you’ll be able to register for VAT. It’s easy enough to do — you’ll just need a Government Gateway user ID and password to sign up, and your best bet is to do it online through the HMRC website.


There’s some basic information you’ll need to input as part of the sign-up:


  • Your business name.
  • Your email address.
  • Your national insurance number.
  • The date your business started and your registered address.
  • The dates of your accounting period.
  • Your accounting type (for example, standard or cash accounting).


Essentially, the MTD registration process boils down to two key steps: signing up to MTD via the GOV.UK website and finding and installing MTD-compliant accounting software.


This switch might seem daunting, but it doesn’t have to be. You can find all the information you need about the Maxing Tax Digital initiative here — and look forward to hassle-free VAT returns from now on!


At The Brew, we do our best to keep our finger on the pulse (and you in the know), so you can stay one step ahead and focus on what makes your business great. Check out our other blog posts for insightful tips, tricks and industry updates and visit our savvy coworking spaces in Shoreditch!