Don’t be an ostrich – You need to be ready for MTD for VAT AND Self-assessment
Below is a modified extract from an
article on HMRC’s website – it is intended to give the whys and wherefores of
the need for MTD readiness for businesses and for those sole traders
and individuals whose taxable earnings from self-employment exceeds £10,000 per year. This would include landlords as well.
Since 2019, the vast majority of VAT-registered businesses with a taxable turnover above the VAT threshold (£85,000) have been mandated 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.
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.
The background to MTDIncreasingly, businesses and agents see the benefits of digitisation. 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 (such as me) and MTD allows agents to continue to provide a full service in supporting their clients.
HMRC knows that the majority of customers want to get their tax right but recent tax gap figures (2018 to 2019) show too many find this hard, with avoidable mistakes costing the Exchequer almost £8.5 billion a year. The improved accuracy that digital records provide, along with the help built into many software products and the fact that information is sent directly to HMRC from the digital records avoiding transposition errors, reduces the amount of tax lost to these avoidable errors.
Since 2019, VAT-registered businesses with a taxable turnover above the VAT threshold (£85,000) have been mandated to keep digital VAT records and send returns using MTD-compatible software. The next step is to extend MTD for VAT to all VAT registered businesses from April 2022. Over 280,000 businesses under the VAT turnover threshold have already joined voluntarily and are experiencing the wider benefits MTD can bring.
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.
Important facts about MTD
Businesses and landlords who join MTD must keep their business records digitally and send tax information to HMRC directly from those records. This would mean storing those records in software that can be recalled when required, but would also need to be compatible with HMRC’s systems for submission of the relevant returns
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. That means that, if you are not already submitting VAT through the MTD system, the deadline for do so for the April 2022 to June 2022 VAT quarter will be 7th August and this MUST be via MTD.
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.
Since 1 April 2019, software that prepares a VAT return to send to HMRC must be MTD-compatible for those mandated to use MTD. Data must also be exchanged digitally between all software used by a business for VAT. The information contained with the MTD VAT return is generated by pulling information from the digital records. This information is the 9 boxes required for the VAT return.
It IS possible to submit MTD for VAT through your own (or your business’s) Government Gateway by using what is known as bridging software, but you would be far better using an agent such as myself to prepare and submit the return on your behalf – we are able to deal with HMRC on your behalf on issues that might arise.
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 and individuals will have over 2 years to prepare and test the service voluntarily prior to its introduction.
There is a major change to the way that Self-Assessment will be handled from April 2024:
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. This includes employment income, bank and building society interest, dividends, pension contributions, student loan repayment etc. Software developers will need to continue to build this additional functionality into their products, resulting in a richer experience for customers as MTD continues to develop.
When referring to MTD-compatible software, they mean software that can integrate with HMRC systems to send updates to HMRC.
HMRC is not offering its own software products but has provided a list of commercially available software that fulfils the criteria. 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.
Details of MTD-compatible software products for Income Tax and MTD-compatible software products for VAT are available on GOV.UK and this information will be updated as and when new products become available.
The advantages of digital record-keeping
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.
Keeping business records digitally means that it’s easier for a business to share their records with their agent, saving both time and costs, and allowing agents to focus on more value-added activity.
Find out more about MTD for VAT
Since 2019 VAT-registered businesses with a taxable turnover above the VAT registration threshold (£85,000) have been required to keep digital VAT records and submit their VAT return to HMRC using MTD-compatible software and these requirements will apply to all VAT-registered clients from April 2022.
Taxable turnover includes standard, reduced and zero rated. But does not include exempt supplies or income outside the scope of VAT.
Once a business starts using MTD for their VAT returns, it can no longer file returns using the HMRC online portal.
Find out more about MTD for 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 2 years to prepare and test the service voluntarily prior to its introduction but eligible businesses can take advantage of the opportunity to go digital for Income Tax now. For more, see guidance on signing your business up to MTD for Income Tax
Businesses can sign up if they’re a sole trader with income from one business and/or are landlords.
If a business that signs up to MTD for Income Tax has no other income to provide to HMRC they won’t need to complete a separate Self-Assessment return.
Where additional personal income needs to be reported, such as employment income, bank and building society interest, dividends and Gift Aid, additional functionality will be made available in the coming months to allow software providers to build this into their products, meaning many more businesses will be able to send all of their additional personal income details using MTD.
Here, you can find more information about MTD for Income Tax. You can also find out more about which software products are already compatible with MTD for Income Tax and HMRC will continue to update this information as more products become available.
MTD: frequently asked questions
HMRC has answered the most frequently asked questions that businesses and agents have about signing up for MTD and starting to use software to keep digital records. They will continue to update this information.