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Contents

  1. 1. Why is HMRC Making Tax Digital?
  2. 2. Making Tax Digital for VAT
  3. 3. Making Tax Digital for Income Tax

Why is HMRC Making Tax Digital?

December 5, 2022
Making Tax Digital is set to change the way self-employed individuals across the UK file and pay their taxes, with VAT-registered business owners having been legally required to comply since April 2019.
Making Tax Digital for Income Tax Self Assessment is the next phase planned to roll out, with a predicted 2.6 million self-employed businesses and individuals, unless eligible for exemption, needing to be ready for the changes in April 2024.

Whether you’re on the cusp of VAT-registration or are preparing for the changes to your Self Assessment tax return, you might be wondering why HM Revenue and Customs (HMRC) is making all these changes in the first place.If so, this article is for you.

Why is HMRC Making Tax Digital?

In a statement released on GOV.UK, HMRC states that it has ambitions to become “one of the most digitally advanced tax administrations in the world,” with Making Tax Digital on course to make fundamental changes to the UK tax system.

The changes put in place under this scheme are set to make tax administration:
    More effectiveMore efficientEasier for taxpayers to get their tax right
Expanding on the latter point, HMRC notes that while the majority of taxpayers want to get their tax right, avoidable mistakes are still rife in tax returns, costing the Exchequer almost £8.5 billion in the 2018/19 tax year.To avoid these mistakes, HMRC plans on phasing out paper-based approaches in favour of digital record-keeping and tax filing. With this in mind, the 2 main changes taking place under Making Tax Digital include:
    Storing digital recordsFiling digital tax returns
To stay compliant, taxpayers are required to use MTD-compatible software to store their business records and to file their tax returns.
To be MTD-compliant, digital software products must contain digital links that can securely transfer data from software up to HMRC’s systems. To stay compliant, you’ll need to use either MTD-approved accounting software, or a combination of spreadsheets and bridging software.

For more details on how you can prepare your business for the changes taking place under Making Tax Digital, read on.

Making Tax Digital for VAT

Making Tax Digital for VAT has been in place since April 2019, but as of April 2022 broadened its scope to include all VAT-registered business owners — not just those with a taxable turnover above the VAT threshold.

To reduce the number of errors made in VAT returns, under Making Tax Digital business owners are required to:
Under MTD for VAT, you’ll need to store the following records digitally:
    Supplies made, or the VAT on the goods and services you supplySupplies received, or the VAT on goods and services you receiveTime of supply and value of supply (excluding VAT) for everything you buy and sellAny adjustments you make to a VAT returnReverse charge transactions — where you record the VAT on both the sale price and the purchase price of goods and services you buyYour total daily gross takings if you’re using a retail schemeItems you can reclaim VAT on if you’re on the Flat Rate SchemeYour total sales plus VAT if you trade in gold and use the Gold Accounting Scheme
You’ll also need to store digital copies of transactions made on behalf of your business by:
    Volunteers for charity fundraisingThird party businessesEmployees in expenses for petty cash
For a full breakdown of the records you need to keep under MTD for VAT, head over to our guide ‘What records do I need to keep under Making Tax Digital for VAT?’.

As for filing your VAT returns, you can find the full list of MTD for VAT approved software at GOV.UK — but to save you from scrolling, we’ll tell you now that Ember is MTD for VAT approved.

Making Tax Digital for Income Tax

Making Tax Digital for Income Tax Self Assessment isn’t due to come into effect until April 2024, but eligible individuals and small businesses can sign up to the pilot scheme now if they wish.

Set to replace the Self Assessment tax return, self-employed sole traders and landlords will need to file 4 quarterly updates detailing their qualifying income and expenses, before submitting an End of Period Statement (EOPS) and Final Declaration to generate their final Income Tax bill.

The scheme will expand to include partnerships in April 2025, with the rules for other business structures due to be announced by HMRC at a later date.
While the requirements for MTD ITSA might seem like more paperwork at first, filing more regularly means records of rental income or business expenditure are less likely to slip through the net. As a result, you’ll get a more accurate picture of your final Income Tax bill, with a reduced risk of underpaying your tax bill or missing out on any tax breaks you’re entitled to.

If you expect to fall within the scope of MTD ITSA, you’ll need to keep ahold of the following digital documents:
    Sales receipts and invoicesEmployment incomeBank and building society interestDividendsPension contributionsStudent loan repayments
For the full list of records to keep, head over to GOV.UK.

As for filing updates on business or property income and expenses, you’ll be able to use either accounting software or a combination of spreadsheets and bridging software. You can find the full list of MTD-compatible accounting software at GOV.UK. You might notice that Ember isn't on the list yet, but we have some very exciting updates in the pipeline — watch this space.

Rachel Cameron-Potter
Rachel Cameron-PotterContent Marketer

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