Making Tax Digital 2023/2024: Everything You Need To Know

Did you know that since 2019, the vast majority of VAT-registered businesses with a taxable turnover above the VAT threshold (£85,000) have been asked to keep digital VAT records and send returns using Making Tax Digital (MTD)-compatible software.

From April 2022 these requirements will apply to all VAT-registered businesses. There will be a requirement to report digitally every quarter, to the 5th of the month, however you can choose to change this to the 30th/31st of the month.

MTD for Income Tax Self Assessment (ITSA) will apply to individuals from April 2024, if their total gross income from self-employment and property exceeds £10,000 in a tax year. Once you have proven you are earning over £10,000 in a tax year, you have come into the system of MTD.

Most businesses will have 2 years to prepare and test the service voluntarily prior to its introduction.

Payment deadlines will stay the same (31st Jan) and payments on account will stay the same (31st Jan and July).

The background to MTD

Millions of businesses are already banking, paying bills and interacting with their customers or suppliers online, and many are already using accounting software.

HMRC’s ambition is to become one of the most digitally advanced tax administrations in the world and MTD is making fundamental changes to the way the tax system works — transforming tax administration so that it is:

• more effective
• more efficient
• easier for taxpayers to get their tax right

The move to digital integration will eliminate many of the existing paper-based processes, reducing errors and allowing businesses and their agents to devote more time to running their business. Many businesses use an agent and MTD allows agents to continue to provide a full service in supporting their clients. It is advised to get the software now to start integrating and there is no plans for HMRC to provide any free software.

Who qualifies?

• sole traders with income from one business and Landlords who rent out UK property
• provided Self Assessment tax returns and payments are up to date and you’re resident in the UK for tax
• you cannot currently join MTD for Income Tax if you have income from any other source or you have other payments you make that are taxable or that you claim tax relief on

Important facts about MTD

VAT

Since 2019, all VAT-registered businesses with a taxable turnover above the VAT threshold (£85,000) have been required to keep their VAT business records digitally and send their VAT returns using MTD-compatible software.

From April 2022 all VAT-registered businesses will be mandated to keep digital VAT records and send returns using MTD-compatible software.

The deadlines for sending VAT returns and making payments have not changed.

Businesses need to use software to keep their business records digitally. This may include dedicated record-keeping software or a combination of software packages or spreadsheets.

Income Tax

MTD for ITSA will apply to individuals from April 2024, if their total gross income from self-employment and property exceeds £10,000 in a tax year. Most businesses will have over 2 years to prepare and test the service voluntarily prior to its introduction.

Businesses and landlords who join MTD for Income Tax will need to send a quarterly summary of their business income and expenses to HMRC using MTD-compatible software. In response they will receive an estimated tax calculation based on the information provided to help them budget for their tax.

At the end of the year, they can add any non-business information and finalise their tax affairs using MTD-compatible software. This replaces the need for a Self Assessment tax return.

The deadlines for finalising tax affairs and making payments are not changing. Businesses and landlords will be able to use their software to send all of the information that they need to under Self Assessment, not just their business or rental income.

Software

This part is all about software that is compatible with HMRC.

HMRC is not offering its own software products but has provided the Application Programming Interfaces (APIs) that commercial software developers are using to develop a range of applications that enable businesses to keep their records digitally and integrate with HMRC systems. An API is software that links 2 or more software programmes together, allowing them to exchange data.

The benefit of this approach is that commercial software developers can offer a more flexible and tailored range of options, functionality and technical support that can cater not just to the requirements of the general business population but also specific businesses and sectors like agriculture, construction, landlords and freelancers.

What records do I need to keep digitally for MTD?

For VAT

MTD does not require you to keep additional records for VAT, but to record them digitally.

Your digital records should include, for each supply, the time of supply (tax point), the value of the supply (net excluding VAT) and the rate of VAT charged. They should also include information about the business, including business name and principle business address as well as your VAT Registration Number and details of any VAT accounting schemes you use. Customers who currently record daily totals can continue to do so, but they have to be captured digitally. If you use spreadsheets to keep business records you’ll need MTD-compatible software so that you can send HMRC your quarterly VAT returns and receive information back from HMRC. Bridging software may be required to make spreadsheets MTD-compatible.

For Income Tax

You’ll have to use software to capture details of all your business income and expenditure for the entirety of your accounting period.Your business records will include details from invoices and receipts for purchases and as a minimum should include the date, the amount and the category.

Advantages of keeping digital

Businesses, regardless of turnover, can benefit from using software to keep digital records. Software not only helps the effective running of a business but also reduces avoidable errors in business records that can occur when manual calculations are performed, or information is transposed by hand.

By keeping up to date digital records in real time, businesses can also reduce the risk of errors due to lost or incorrectly recorded invoices.

Going digital makes managing business finances more straightforward. Millions are already banking, paying bills and interacting online — going digital with business records and taxes is the next step, giving business more control and better capability to forward plan with their finances.