Making Tax Digital for Your Small Business

Reading Time: 8 minutes Making Tax Digital can take a bit of getting used to. So, we thought it might be useful to strip it all back and simplify what it means for you and your small business. We hope you find it helpful.

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Making Tax Digital for Your Small Business

making tax digital
Reading Time: 8 minutes

Making Tax Digital is a Government initiative to help people and businesses manage their tax affairs more effectively and more efficiently. It forms an important part of the Government’s ambition to make the UK a ‘global leader in digitally advanced tax administration’. And, according to lawmakers, it’s already ‘making fundamental changes to the way our tax system works’, making it ‘easier for people and small businesses to get their tax right first time’.

In this article, we’ll explore everything you need to know about Making Tax Digital. We’ll look at what software you need, what support is available, and what deadlines you must adhere to. Let’s get started.

What is Making Tax Digital?

Making Tax Digital is a key component of the Government’s long-term strategy to streamline the storing and submitting of tax returns. It mandates the practice of online record-keeping. And, it makes it a legal requirement to record and submit tax information digitally.

First announced back in 2015, the legislation aims to combat non-compliance, reduce human error, ease delays, and encourage a paperless, digitised future for tax and financial management.

So, who does it impact?

Those who are obligated to Make Tax Digital should already be complying with the legislation and may face a penalty if they fail to do so. That includes larger businesses with a taxable turnover of more than £85,000 (which is above the VAT-threshold), who have been ‘Making Tax Digital’ for some years now. In April 2022, it became a requirement for all VAT-registered businesses as well – even if their turnover fell below that threshold. Businesses who have voluntarily registered for VAT also need to follow Making Tax Digital guidelines.

Phase 3 of the rollout is set for 2024, when Making Tax Digital will expand to include all Self-Assessment taxpayers too. This means sole traders and landlords with gross incomes of more than £10,000 per year will also be included. This will extend to general partnerships a year later.

Finally, Making Tax Digital for Corporation Tax is scheduled to begin in 2026, at the earliest. You can take a look at the Government’s consultation on the structure and feasibility of MTD for Corporation Tax, here.

Making Tax Digital: VAT

Making Tax Digital for VAT became a requirement in April 2022. It means that all VAT-registered businesses now need to store their records digitally, using appropriate software.

HMRC may check a business’s VAT records to ensure they’re contributing the correct amount of tax. The following records must now be kept digitally:

  • VAT on the goods & services your business supplies
  • VAT on the goods & services your business receives
  • Records of the ‘time’ & ‘value’ of supply (excluding VAT) for everything you buy and sell
  • Any adjustments made to a return
  • Reverse charge transactions
  • Use of any VAT accounting schemes
  • Total daily gross takings (for businesses using a Retail Scheme)
  • Items on which VAT is reclaimable (for businesses using a Flat Rate Scheme)

Records will need to be kept for a minimum of six years. And, you’ll also need to maintain a separate VAT account, which details the amount of VAT you charge or pay on your purchases. Figures need to be reported to HMRC once every quarter and your account needs to demonstrate:

  • Total VAT sales
  • Total VAT purchases
  • Any VAT owed to HMRC
  • Any VAT reclaimable from HMRC
  • Whether your business uses the Flat Rate Scheme (+ flat rate percentage & turnover)

For more information on keeping and maintaining digital VAT records, click here.

Making Tax Digital: Income Tax

As we mentioned earlier, ‘Making Tax Digital for Income Tax’ will come into effect from April 2024. That means, from the 2024/25 tax year, all landlords and self-employed sole traders with an annual business or property income of more than £10,000 will need to store and submit their tax records digitally.

The pilot for this phase of the scheme began in early 2022. And, you can already volunteer to commit to Making Tax Digital for Income Tax now instead of filing a Self-Assessment tax return. HMRC believes it will allow people to view records in real-time, file quarterly returns, and therefore be more attuned with their tax responsibilities as a result.

Making Tax Digital: Software

HMRC stipulates that you need to have access to ‘compatible software’ before signing up to Making Tax Digital. You must then use this software to store your tax and VAT records moving forward. The practicality, usability, and the way in which you store and complete VAT returns, will differ depending on the product you select.

‘Compatible software’ is defined as either of the following:

  • ‘A software package that’s compatible with HMRC and allows you to keep digital records and submit VAT returns’
  • ‘Bridging software that connects non-compatible platforms (also known as ‘legacy software’) to HMRC systems’

For a full list of HMRC’s recognised software, click here.

These packages provide a wide array of other functionalities too. So, it’s worth doing your research to identify ones that can enhance – and add value to – your small business. Whilst most of these software solutions are ‘paid for’ services, there are free alternatives available.

As above, if you currently keep records on spreadsheets, you’ll need a ‘bridging software’ solution to submit your return to HMRC. Bridging software takes the data from your current system and formats it in such a way that it can be processed by HMRC.

If you’re already recording your tax and VAT digitally, but not with an HMRC-approved programme, you will need to consider the above. Furthermore, if you currently use multiple software systems to store and submit your tax returns, you will need to make sure they’re linked.

Recent research into the impact that Making Tax Digital for VAT has had on small businesses found that the benefits of the service outweighed the software/accounting costs for most businesses. The majority of those surveyed said that it reduced the time they spent checking submissions, and increased their confidence in getting tax right first time. Similarly, most businesses reflected that signing up and submitting returns digitally was ‘faster’, ‘easier’, and ‘reduced the potential for mistakes’.

You can find out more, here. Or, if you want to learn more about the best tools and technology for small businesses, click here.

Making Tax Digital: Support

HMRC provides digital guidance and support to make the switch to Making Tax Digital as simple and straightforward as possible. This includes webinars and videos to help companies and agencies send online VAT returns and Income Tax updates direct to HMRC.

It’s also worth checking out HMRC’s ‘Stakeholder Communications Pack’. The contents of which can be used to inform key messages and communications activity for members, customers, and clients.

HMRC have also published a VAT notice. This explains the rules surrounding Making Tax Digital for VAT. It also touches on the digital information that you’ll need to keep.

Of course, if you employ the services of a specialist business accountant, they’ll be able to take care of much of this for you. They can sign you up for Making Tax Digital, file returns on your behalf, and provide technical support and advice to help you make the most of the software. You will, though, still need to keep VAT records digitally yourself.

At Danbro Business, for example, we harness the very best cloud accounting technology to enhance and streamline the accountancy service our clients receive. Hosted in the cloud, information is easily accessible and readily available. Different packages and types of software provide different levels of service, all of which are compatible with HMRC and Making Tax Digital.

What’s more, through our exclusive digital accounting solutions, you can get important company financials delivered straight to your smartphone. All in real-time. This allows you to make key business and cash flow decisions on the move. Our sophisticated tech stack includes software from some of the industry’s biggest names. And, depending on your circumstances we, as leading cloud accountants, can recommend which platform, or platforms, best suit your needs.

Making Tax Digital: Deadlines

VAT returns are submitted each quarter. Legally, you must adhere to Making Tax Digital from the beginning of your business’s first VAT period after March 31st 2022.

You need to file your returns within one month and seven days of the end of each quarter.

Please be aware that if your small business is required to submit an online tax return and you fail to comply you could get penalised by HMRC.

Making Tax Digital: Exemptions

One common question we get asked is, ‘can I be exempt from Making Tax Digital?’

Whilst it’s uncommon to be granted an exemption, there are circumstances where you may be entitled to one. This includes reasons such as religious beliefs that are incompatible with the use of electronic communications. Or, an inability to submit digital returns due to disability or things like your age or remoteness of location. HMRC considers each exemption application on a ‘case by case basis’.

Furthermore, you’re automatically exempt from Making Tax Digital for VAT if your business is subject to insolvency. Or, if you’re already exempt from filing VAT returns online.

To apply for an exemption, click here and follow the instructions.

How to Sign Up

Once you – or your accountant – have the requisite software in place, you need to sign up for Making Tax Digital. Registration is not automatic. So, if you’ve yet to sign up, please do so here.

Before you begin, you’ll need the following information to proceed with your registration:

  • Business email address
  • Government Gateway ID & password
  • VAT registration number (+ your most recent return)
  • Company registration number & Unique Taxpayer Reference (limited companies)
  • National Insurance number (sole traders)
  • Unique Taxpayer Reference & postcode of registration (general partnerships)
  • Company registration number, Unique Taxpayer Reference & postcode of registration (limited partnerships)

After you’ve input the necessary credentials into the Government Gateway, they’ll be verified by HMRC.

You should then receive a verification message from HMRC to confirm that your business can begin submitting returns. You’ll need to activate the relevant feature in the settings of the software programme you’ve selected. Your supplier will be able to help you if you have any questions or concerns.

Make Tax Digital with Danbro Business

If you’re not completely up-to-speed with Making Tax Digital, don’t worry. You’re not alone. But, whilst you might not necessarily be an expert in digital taxation or the latest legislation, your accountant certainly should be.

As Neil Ormesher, Managing Director of Danbro Business, puts it: “We see the positives in Making Tax Digital.”

“Using the right digital tools brings much more efficiency to a business,” he said. “Furthermore, it gives business leaders timely information to help them make those difficult decisions. We see this as a real opportunity to set your systems, your processes, and your small business up for the digital future.”

We’re cloud-accounting specialists. And, as part of our exclusive plans, we provide free access to award-winning online accounting packages, such as XeroFreeAgent and QuickBooks. These platforms are slick, sophisticated, and simple to use. You’ll be able to track your income and expenses straight from your smartphone and record transactions on the go.

So, find out how Danbro Business can help you Make Tax Digital by getting in touch today. Our bespoke, technology-led approach combines the experience and expertise of our tax and accounting specialists, with the very best software on the market.

Blog written by
Sam Wright
Marketing Manager at The Danbro Group

Sam Wright is Danbro’s Marketing Manager. He produces regular content and feature articles on our digital and non-digital channels – and social platforms – for the Danbro Group and its subsidiaries, as well as having responsibility for the Company’s internal and external communications.

His background is in Journalism and Creative Writing, having previously contributed to publications such as The Daily Post, The Lancashire Evening Post, and The Blackpool Gazette.

He is a keen swimmer and avid Manchester United fan (but don’t hold that against him), and he lives in Lancashire with his wife, Sarah.

 

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