Person in orange jumper on laptop

Contents

  1. 1. How is the Making Tax Digital Scheme different to the current tax system?
  2. 2. Will I be fined if I don't do my tax digitally?
  3. 3. Which records do I need to keep digital? 
  4. 4. How does the Making Tax Digital scheme affect VAT returns?
  5. 5. Summary

What does Making Tax Digital mean for businesses?

October 6, 2021
It can be hard to keep track of all the various taxes and bills that your small business needs to pay on time. As your company grows, you could find yourself with a large increase of receipts and records you need to keep to help you calculate the correct amount you need to pay to HMRC annually.Despite the best efforts of company directors and owners, many businesses make mistakes when it comes to paying their taxes. Between 2018 and 2019, errors made by companies when paying their taxes amounted to a cost of £8.5 billion to the Exchequer. This staggering amount has led HMRC to try and find new ways to help companies easily and efficiently pay their tax on time.The UK government has ambitions to become a tax authority that is digitally advanced compared to other systems around the world. To help them achieve this goal, they have recently introduced the Making Tax Digital scheme to help improve the way companies throughout the country pay and record their taxes. There are many benefits to the new system, such as the ability to keep records in one location and get reminders automatically issued to show when upcoming tax deadlines are.The Making Tax Digital programme is set to help businesses deal with their tax in various innovative ways, but it does come with a few changes to how companies have traditionally dealt with tax.

What does Making Tax Digital mean for businesses?

Using the Making Tax Digital (MTD) scheme means that your business will have to invest in technology to digitally compile your tax accounts if you haven't already done so. This may be quite challenging if your company has predominately used a paper-based system in the past or you haven't registered for a business tax account on the government website.The government scheme should help business owners in the long run when it comes to compiling tax information and accounting records. With MTD in place, business owners are less likely to face fines for missing deadlines or underpaying taxes since the information will already be laid out for them. Using MTD-compliant software can also help you keep your digital records in an orderly manner, making it easier to maintain and review.In this article, we'll talk you through how Making Tax Digital will affect the way you file tax returns, which records you need to start keeping online, and how you can sign up for the scheme.

What does Making Tax Digital mean?

The first MTD scheme to be introduced was Making Tax Digital for VAT in 2019, affecting approximately 1.2 million business owners. After the shift, business owners were required to file their tax returns online, with ever transaction documented online to support to tax statement given to HMRC.HMRC will soon expand the scheme to include all other forms of tax. The entirety of business accounts will all run through MTD-compliant software and will be sent straight to HMRC without the need for physical paper copies. 

Do I have to register for the Making Tax Digital scheme?

Eligible businesses that had a taxable turnover of £85,000 were required to register for the Making Tax Digital scheme by 1 April 2019. As of April 2023, the registration threshold was dropped, meaning businesses with a taxable turnover of less than £85,000 will also need to register. There are, however, a few exceptions to the rule where MTD is not compulsory and businesses can still continue to submit their tax returns through the post.Around £41 billion payments have already been processed through the system. In addition, a quarter of businesses – around 270,000 – that fall below the £85,000 or less threshold have voluntarily joined the scheme early, before it becomes mandatory in April 2024. The scheme was initially due to launch in April 2023, but has been delayed another year due to the coronavirus pandemic.Those who are self-employed with an annual business turnover of over £10,000 are due to register for the Making Tax Digital scheme from April 2025. They can also voluntarily start using MTD to send Income Tax reports instead of a Self Assessment tax return before the deadline. 

How is the Making Tax Digital Scheme different to the current tax system?

Before the introduction of MTD, companies traditionally filed their tax returns through the post on an annual basis. However, advancing technology means that HMRC is moving their attention to digital tax systems, allowing users to compile their tax records online and in real-time, all in one place.HMRC requires you to use MTD-compatible software before you can register your company for Making Tax Digital. Our cloud accounting software is MTD ready, and can be used to file your tax returns and reports, such as VAT and Income Tax, with HMRC.The original system of filing an annual tax return online will be replaced with reports and filing that are due every financial quarter. You will be expected to keep your records updated throughout the year too.Research has found that micro-businesses had a productivity increase of 11.8% when using web-based accounting software. The ease with which businesses can file their accounts online means that the process has become less time-consuming and more efficient. With the right accounting software in place, your company is much less likely to underpay taxes as the amounts will be automatically calculated before being sent directly to HMRC.

Will I be fined if I don't do my tax digitally?

By using the MTD system, you're less likely to miss deadlines if you listen to the reminders issued by your software and business tax account. However, if you do happen to miss a submission deadline, you will receive a point. A point threshold is set depending on how often you are due to submit your tax returns. Once you have hit this threshold, you will be charged a £200 fine.Taxes due on an annual basis have a two-point threshold, quarterly submissions have a four-point and monthly has five points. By following the tax digital rules, you can easily avoid these penalty points. Penalties through Making Tax Digital work differently from the old VAT return system. Companies that aren't registered for MTD have to instead pay a percentage of the remaining VAT owed, although you won't have to pay a surcharge on your first late payment. For example, businesses with an annual turnover of £150,000 have to pay a 2% surcharge on their second late payment, whilst companies making less than £150,000 pay 2% on their third late payment (provided the missed amount was more than £400). HMRC can charge you up to 100% of the missed payment if it was due to careless or deliberate actions on your part. You can also be charged £400 if you submit a paper version of your VAT return rather than a digital copy unless HMRC has said you are exempt from using MTD or your VAT online account.

How do I sign up for Making Tax Digital?

Businesses have their set deadlines for when a move to MTD is mandatory, but your company can voluntarily decide to register early if you so choose. VAT registered businesses have to use the gov.uk website to sign up for MTD. Make sure that you have already registered with an MTD-compatible software (such as our system here at Ember).To register on the government website, you will need your business email address, Government Gateway login information and other details for the relevant tax (such as your VAT registration number). Sole traders will need their National Insurance number as well, whilst limited companies need their Unique Taxpayer Reference. You will also need to supply your company name and postcode. You can't sign up less than seven days before your tax return is due or five days after it was due. This is because the system may process it twice if you are registered for the MTD scheme at the same time as the standard system. Confirmation should get emailed to you within three days of your application. After you have received this confirmation, you can then file your tax return. 

Which records do I need to keep digital? 

The Making Tax Digital scheme requires your business to submit and update relevant information to your digital account. This includes your business name and address, as well as your total company sales. In terms of VAT, there are a number of records that you need to file on your online business account. You must update regular information about your VAT on goods and services, items that you have reclaimed VAT on and the time and cost of sales (excluding VAT). You must also digitally record all of your transactions, although this can be done without the need for you to scan the physical receipts. These records can be kept on your Ember account so that they can be sent over to HMRC as part of your tax return. You will still have the same VAT and other tax deadlines as you did before registering for MTD. 

How does the Making Tax Digital scheme affect VAT returns?

VAT returns were the first MTD scheme to be fully launched as a live pilot launched in 2018. During this period, HMRC was able to identify issues and find solutions concerning the process of filing the VAT reports. Businesses have to follow the MTD submission and documenting rules from their first return, starting from the relevant deadline. For example, if your business has a turnover of less than £85,000, you would have to file a digital VAT return on or after the deadline from April 2023. You are required to keep all of your VAT records digital from the time that your deadline for transference to MTD occurs. The updated features for VAT returns through the Making Tax Digital scheme includes a repayment tracker. This allows businesses to see when they will receive their VAT repayment and how much to expect. Through the online systems, you can also view and print your company's VAT certificate. 

Summary

Making Tax Digital is a scheme that is set to revolutionise how businesses record and pay taxes. There are set deadlines for various business sizes to completely digitalise how they deal with taxes. After the deadlines have passed, you'll no longer be able to file a physical tax return on paper, and you may be issued with a penalty for missing the tax deadline. The scheme is a modern way for digitally advanced tax administrations in companies of all sizes, from sole traders up to large corporations. It means that your company has to start using MTD-compliant software for digital record keeping before your taxes are filed with HMRC.While the current scheme is currently based around VAT tax returns, HMRC is planning to roll out Making Tax Digital for Income Tax and other kinds of taxes in the coming years. Transitioning from paper to digital may prove to be a challenge at first, but will ultimately help make keeping track of your taxes much easier and more beneficial in the long run.
Daniel Hogan
Daniel HoganCOO & Co-Founder

You might also like

Freelancer working from home office | A Complete Guide to National Insurance

Rachel Cameron-Potter

·

Startup

The Complete Guide to National Insurance

Female-led startup employees brainstorming around a table | What is a VAT receipt?

Ellie Perkins

·

Startup

What is a VAT receipt?

Freelancer on the phone at wooden table | How to find work as a freelancer

Rachel Cameron-Potter

·

Freelancer

How to find work as a freelancer

Don’t take our word for it.

Try Ember for free.

With our super software and talented team of qualified accountants, taking care of your business admin has never been easier. Try us free for 14 days today.

Ember