With MTD aiming to restructure the UK tax system, change is inevitable, and adapting to change is seldom easy. However, MTD is here to stay, so businesses and individuals need to understand it. In this article, we’ll share 5 things you should know about MTD in order to succeed with the new system.
1. Annual tax returns are a thing of the past
One of the main highlights of MTD is the end of filing annual returns. You’ll no longer have to submit 12 months’ worth of data at the end of every year. Instead, you submit reports to HRMC every quarter. Each time you file, you can see HMRC’s calculation of the tax you owe.
Though submitting records every 3 months means more deadlines to be met and a little more bookkeeping work, it will be beneficial for businesses. Keeping your business finances constantly updated means you are always aware of your tax liability. When you always know how much you owe, you can avoid unpleasant surprises at the end of the year.
2. You will need to use software, but you can keep your spreadsheets
MTD requires businesses to go digital. As a taxpayer, you’ll be required to use accounting software so you can upload your data to HMRC’s interface. The transition shouldn’t be difficult if you are already using a digital accounting system. But if you are still doing your accounting on paper, you will need to move to a digital system.
Though HMRC didn’t initially encourage the use of spreadsheets for financial record keeping, they have now approved the use of MTD compliant spreadsheets. As long as the spreadsheets can be integrated with an accounting app for the upload to HMRC, they can still be used.
3. MTD has already started
Making Tax Digital has already begun. HMRC has already launched a private pilot program for certain taxpayers who have voluntarily subscribed. You already have access to your digital tax account, where you can see all your tax liabilities in one place. Here is the timeline for the rest of the MTD rollout:
- April 2018: Pilot testing begins.
- April 2019: All businesses with turnover above the VAT threshold of £85,000 will be required to keep digital records.
- April 2020: HMRC will increase the scope of MTD to include sole traders and partners with income between £10,000 and £83,000.
4. MTD doesn’t mean paying more taxes
Though MTD means more reporting deadlines, it doesn’t mean you have to pay more tax than usual. The new system just eliminates tax reporting errors. It’s possible that if you have been making errors in your tax returns, your tax bill might go up when those errors are corrected, but not because of any change in the tax laws. The new process will correct your errors so that you pay what you actually owe– which means that if you’ve been doing things right up to now, your tax bill won’t change at all.
5. Some taxpayers are exempt from MTD
Even though MTD offers a lot of benefits, HMRC has allowed some businesses and individuals to be exempt from it. All self-employed individuals and unincorporated businesses with an annual turnover below £10,000 are exempt from MTD, as are charities, community amateur sports clubs, and possibly insolvent businesses.
HMRC has also recognized that some individuals cannot go digital due to their religion, age, disability or remote location.
MTD is going to involve some major changes to the way you file taxes, so it’s important to make sure you’re prepared for it. Depending on your business volume, you might need to start using the new online tax system either next year or the year after. In the meantime, get your accounting in order! If you haven’t already, find the right accounting software for your business and get used to keeping your financial records up to date. Getting comfortable with online accounting first will make your life much easier when it’s time to switch to online tax filing.