Making Tax Digital (MTD) is a government initiative to modernise the tax system, with the aim of making the whole process of administrating tax simpler and more efficient. All of your tax information will be in one place (your digital account), and you will be able to pay tax based on your business activity during the year, uploading and updating your tax account in real time.
If you own a business or are self-employed and you pay income tax, VAT or corporation tax, then it is quite likely you will be affected. This means you could be required to keep track of your tax affairs digitally using MTD compatible software, and to update the tax system via your digital tax account.
It will be a legal requirement, and there will be penalties for non- compliance. Everyone will be allocated a digital account through the current Government system. You’ll need to log into this and update your information, using digital accounting software. This means that you will need to move from your existing desktop or manual record keeping and onto a cloud accounting package. LF Bookkeepers can advise you on the software you will need and how to comply with reporting requirements.
Tax information will need to be submitted every three months, which means that there will no longer be a worry of cramming twelve months of work at the end of the financial year.
Far less paperwork
Your cloud accounting software will make an automatic record of financial transactions coming into and out of your business. This will be checked against information submitted each period.
Because tax will be calculated quarterly, there’s far less chance of a big bill building up. You’ll find out what your tax liability is every few months so nothing gets out of hand.
More chances of lowering your bill through tax planning
Businesses that keep regular tabs on the tax they owe can make strategic decisions to lower their bill. You might make more retirement contributions or reinvest in the business, for example.
There’s not much wrong with gaining greater visibility of your tax situation. For some businesses, however, there will be changes to manage. Here’s a summary of the issues you may have with making tax digital:
Compulsory use of technology
By making tax digital for businesses, the tax authorities requires you to submit returns online, through an online accounting software.
More reporting deadlines
While VAT returns were already submitted regularly , income tax and corporation tax weren’t. After Making tax digital takes effect, the single annual filing for income tax and corporation tax will be submitted by online software.