22/10/2024
Making Tax Digital (MTD) has been a hot topic for some time, but it can be confusing to figure out how MTD applies to your business and understand what you need to do to become MTD-compliant.
Read on to discover what MTD for income tax self-assessment (ITSA) is, who it applies to and the steps you need to take in order to make the digital transition.
What is MTD?
Making Tax Digital (MTD) is a UK government initiative aimed at transforming the tax system to simplify the process. It aims to make it easier for taxpayers to get their tax right by creating a more efficient system.
To be MTD compliant, all eligible businesses and individuals must:
* Keep digital records
* Use software compatible with MTD
* Submit quarterly updates
Who does MTD apply to?
All VAT-registered businesses are already required to be MTD compliant. However, individuals who pay income tax on their profits will also be required to comply with MTD. From 2026, Making Tax Digital for Income Tax Self-Assessment (MTD for ITSA) will apply to small businesses, sole traders and landlords with an annual turnover of £50,000 or more. In 2027, this threshold will be lowered to £30,000.
It’s important that you’re aware whether you need to conform to MTD, as there are some exemptions – you can check your eligibility on the HMRC website.
These deadlines may seem a long way off, but when it comes to making the transition to MTD, the sooner you start the process, the less stressful it will be.
It might sound like a daunting task, but you’ll reap the benefits: the automated calculations and data transfers will reduce errors; the process of maintaining records and filing returns will be streamlined, saving you time; and you’ll get more up-to-date information on your business financials and your tax liabilities.
So, here’s what you’ll need to do to be MTD compliant:
Choose the right software:
You’ll need to use software that is HMRC compatible. It must be able to retain and preserve records digitally and receive confirmation from HMRC that your business is compliant.
There are a number of third-party software providers such as Xero, that offer HMRC-recognised MTD software. HMRC also provides guidance on software that works with MTD for Income Tax
Digitise your records:
After you’ve set up your software, you should use it to track your income, expenses and other tax-related information. This information will need to include more detailed income and expenses.
Submit quarterly updates:
Currently, you’re required to submit an annual tax return, but when MTD comes into force you’ll need to submit cumulative returns every quarter – so you can no longer wait until 9 months after the deadline!
While cumulative reporting enables a taxpayer (or their agent) to correct an error in their quarterly updates, by doing so in their new return, the new regulations confirm that there will be the opportunity to correct any errors in the final quarterly update in the “final declaration”
Stay informed:
The deadlines, thresholds and requirements for MTD are always subject to change. Therefore, it’s important to stay on top of any new regulations to avoid unnecessary penalties. Check the HMRC website for MTD updates.
Consider seeking professional advice:
The process of becoming MTD-compliant can be confusing and time-consuming – to ensure a smooth transition for your business, it might be worth involving a professional accountant. Mandy A Roger Chartered Accountants can advise you on what software to use, set it up with you, and provide you with ongoing MTD advice. We can take care of your bookkeeping or provide you with relevant training, so you won’t have to stress about taking care of your filing every quarter.
Summary:
If you’re a business owner making the MTD transition, you should:
* Understand how MTD applies to your business
* Choose and implement MTD-compatible software
* Digitise your records
* Stay up to date with MTD compliance requirements
* Consider professional advice or services for a stress free transition
