What Is ‘Making Tax Digital’?

Written By Dwayne Barnett

The way businesses manage their taxes is undergoing a significant transformation in the UK, thanks to the government’s Making Tax Digital (MTD) initiative. But what exactly is Making Tax Digital, and what does it mean for you and your business? In this blog post, Lloyds Accountancy explains the essentials of MTD, why it was introduced, and how it affects your tax reporting.

What Is Making Tax Digital?

Making Tax Digital is a government initiative aimed at modernising the UK’s tax system, making it easier for businesses and individuals to get their tax right and keep on top of their tax affairs. MTD requires taxpayers to keep digital records and submit their tax information to HMRC using compatible software. The goal is to make the tax process more efficient, reduce errors, and improve the accuracy of tax reporting.

Why Was Making Tax Digital Introduced?

The UK government introduced Making Tax Digital to address several challenges within the existing tax system:

  • Reducing Errors:

    • HMRC estimates that errors in tax submissions cost the Exchequer billions of pounds each year. MTD aims to reduce these errors by ensuring that records are kept digitally and that tax returns are submitted directly from software, minimising the chances of mistakes.

  • Improving Efficiency:

    • By moving away from paper records and manual submissions, MTD aims to streamline the tax process. This not only benefits HMRC but also makes it easier for businesses to manage their tax obligations.

  • Enhancing Transparency:

    • With MTD, businesses will have a clearer, real-time view of their tax position, helping them make more informed financial decisions.

  • Supporting the Digital Economy:

    • As more business activities move online, MTD is designed to align the tax system with the digital age, making it more relevant to modern businesses.

Who Does Making Tax Digital Affect?

MTD is being rolled out in phases, affecting different groups at different times:

  • MTD for VAT:

    • The first phase of MTD was introduced in April 2019 and applies to VAT-registered businesses with a taxable turnover above the VAT threshold (currently £90,000). These businesses are required to keep digital VAT records and submit their VAT returns using MTD-compatible software.

    • From April 2022, MTD for VAT became mandatory for all VAT-registered businesses, regardless of turnover.

  • MTD for Income Tax:

    • The next phase, MTD for Income Tax Self Assessment (MTD for ITSA), is scheduled to come into effect from April 2026. This will initially apply to self-employed individuals and landlords with an annual business or property income above £50,000, requiring them to keep digital records and submit quarterly updates to HMRC via MTD-compatible software. The threshold will lower to £30,000 from April 2027.

  • MTD for Corporation Tax:

    • MTD for Corporation Tax is expected to be introduced later, with a pilot expected to begin in 2024 and full implementation planned for 2026 at the earliest. This will require companies to keep digital records and use MTD-compatible software to submit their tax returns.

What Are the Benefits of Making Tax Digital?

Making Tax Digital offers several benefits for businesses and individuals:

  • Reduced Errors:

    • By submitting tax information directly from digital records, MTD reduces the risk of errors that can occur with manual data entry and paper submissions.

  • Better Financial Planning:

    • With more accurate and up-to-date records, businesses can have a clearer view of their tax position, helping them to plan and manage their finances more effectively.

  • Time Savings:

    • Automating the tax process through MTD-compatible software saves time, allowing businesses to focus on other important aspects of their operations.

  • Improved Compliance:

    • MTD helps businesses stay compliant with tax regulations by making it easier to meet their tax obligations accurately and on time.

How Can You Prepare for Making Tax Digital?

Preparing for MTD involves a few key steps:

  • Choose the Right Software:

    • Ensure that you are using MTD-compatible software to manage your accounts and submit your tax returns. There are many options available, from simple bookkeeping tools to comprehensive accounting packages.

  • Keep Digital Records:

    • Start keeping your financial records in a digital format. This includes income and expenses, invoices, receipts, and other relevant documents.

  • Understand Your Obligations:

    • Familiarise yourself with the specific MTD requirements that apply to your business. This includes knowing the deadlines for quarterly submissions and ensuring that you are ready to comply with the new rules.

  • Seek Professional Advice:

    • If you’re unsure about how MTD affects your business, it’s a good idea to seek advice from a qualified accountant. They can help you choose the right software, ensure your records are compliant, and guide you through the process of submitting your tax returns under MTD.

How Lloyds Accountancy Can Help

At Lloyds Accountancy, we’re here to support you through the transition to Making Tax Digital. Our team of experienced accountants can help you choose the right software, set up your digital records, and ensure that you comply with MTD requirements. We can also assist with quarterly submissions and year-end tax returns, giving you peace of mind that your tax affairs are in order.

Making Tax Digital represents a significant change in the way businesses manage their taxes, but with the right preparation and support, it doesn’t have to be daunting. If you have any questions about MTD or need help getting ready, contact Lloyds Accountancy today. We’re here to help you navigate the digital tax landscape with confidence.

Dwayne Barnett
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