Making Tax Digital for Businesses

Prepare your business for Making Tax Digital

The type of tax you pay when you run a small business and how you pay it, will depend on your company's business structure. A sole trader's tax bill will differ from that of a limited company, or a partnership.

Making Tax Digital (MTD) will affect all businesses and is a key element of the government’s plans to make it easier for businesses and individuals to get their tax right and keep up to date with their affairs. It is HMRC’s ambition to have the one of the most digitally advanced tax administrations in the world. Make sure that your business is prepared.

VAT and MTD has started

The first phase of MTD came into effect on 1 April 2019 when all VAT registered businesses with a turnover of £85,000 (the current VAT threshold) were required to submit their VAT returns using digitally compliant software. It affected all types of businesses - sole traders and limited companies and it meant that it was no longer possible to log into the HMRC website to add VAT data and submit the return.

There’s an important deadline coming up, as all VAT registered businesses will be required to follow the MTD rules for their first VAT return after April 2022. This means that all registered businesses must sign up to Making Tax Digital from 1 April 2022, regardless of turnover.

MTD for Income Tax is coming soon

The next stage in MTD will apply to income tax. Self-employed businesses and landlords with annual business or property income above £10,000 will need to follow the rules for MTD for Income Tax from their next accounting period which starts on or after 6 April 2023. This will affect all businesses regardless of VAT status. Under MTD it is proposed that the Self Assessment tax return will be replaced by five new reporting obligations made during and after the tax year.

Consulting on MTD for Corporation Tax

Corporation Tax (CT) must be paid by limited companies on any profits arising from their business. There are nearly three million businesses which are within the scope of Corporation Tax and around half of them incur a CT liability every year. The government is currently consulting on the design of MTD for Corporation Tax. The planned go-live date for full MTD for Corporation Tax is in 2026 - more than five years away.

The benefits of a digitalised tax system

Given the difficult year that businesses and individuals have faced during the Pandemic, many businesses have adopted to working more remotely and have accelerated the use of technology.  MTD may now feel less of a challenge and more of a natural progression, given the level of digitalisation over recent months.

If you are self-employed and below the VAT threshold, you would benefit from starting to prepare for MTD and adopting technology now rather than delaying this until closer to 2023.

For those coming to terms with the new business conditions resulting from COVID, many may also be looking to set up as self-employed or starting a property portfolio and therefore these individuals would be best to start with systems that will meet MTD requirements.

Businesses already using MTD are benefitting from more efficient systems and are gaining greater visibility on financial reporting and forecasting tax estimates. This real time information on cashflow is proving to be a bonus in the current times.

Getting prepared for Making Tax Digital

When the time comes, businesses will need to send their digital tax returns using compatible software. The product you use to submit digital tax returns needs to be compatible with HMRC and examples include Xero, Quickbooks, and Sage. See a full list of compatible software

So make sure you get prepared and investigate software or apps that can integrate with HMRC's Making Tax Digital system. Also talk to your accountant/bookkeeper about how they can help you prepare.

Don’t forget to make sure that you have the right business insurance in place with all your computer equipment and software adequately covered by your business insurance policy.

Business insurance from Towergate

Whether you’re a large business, SME or sole trader, work from home or have a property empire - Towergate have got an insurance policy for you. For more information, visit our dedicated business insurance page.

About the Author

Alison Wild Bcom Hons MAAT MATT Taxation Technician Commercial Tax Pensions Insurance And Marketing Specialist AuthorAlison Wild BCom (Hons), MAAT, ATT, Taxation Technician is a highly respected industry professional who has been working with and advising SMEs in areas including tax, pensions, insurance and marketing for over 25 years. She is a member of the Association of Accounting Technicians (AAT) and Association of Tax Technicians (AAT) and also has considerable experience as a residential landlord.