What does Making Tax Digital really mean for businesses?
Making Tax Digital (MTD) for Businesses is a UK government initiative designed to simplify and modernise the tax system. It focuses on replacing traditional paper-based processes with digital solutions to improve efficiency and accuracy. Here’s an overview of what it entails and why it’s important:
Core Features of Making Tax Digital for Businesses:
- Digital Record-Keeping: Businesses are required to maintain their financial records digitally using compatible software.
- Quarterly Reporting: Instead of annual tax returns, businesses submit updates to HM Revenue & Customs (HMRC) every quarter via digital platforms.
- MTD-Compatible Software: Businesses must use approved software to record financial transactions and communicate with HMRC.
What is the timescale for Making Tax Digital for Businesses being introduced:
- VAT (Value Added Tax):
From April 2019, VAT-registered businesses with taxable turnover above the VAT threshold (£85,000) have been required to use MTD for their VAT returns.
From April 2022, this expanded to all VAT-registered businesses, regardless of turnover.
- Income Tax Self-Assessment (ITSA):
From April 2026, self-employed individuals and landlords with annual business/property income above £50,000 must use MTD for ITSA.
From April 2027, this requirement will extend to those earning between £30,000 and £50,000.
Plans for MTD for Corporation Tax are under consideration but have not yet been finalized.
Why is MTD Important?
MTD will inevitably help business owners to run their business and have a fuller understanding of their tax liabilities throughout the financial year.
Improved Accuracy:
Digital records reduce human errors often associated with manual bookkeeping, ensuring tax submissions are more accurate.
Enhanced Compliance:
Frequent updates make it easier for businesses to stay on top of their tax obligations, reducing the risk of late filings or penalties.
Efficiency Gains:
Automation streamlines tax reporting processes, saving time for businesses and accountants.
Reduced Tax Gap:
HMRC estimates that tax evasion, error, and non-compliance cost billions annually. MTD helps reduce this “tax gap” by improving transparency and data integrity.
Better Financial Insights:
Regular reporting allows businesses to better understand their financial position and make informed decisions throughout the year.
What are the challenges for businesses? While MTD has clear benefits, some challenges exist such as cost of compliance and the digital skills gap. Small businesses may face initial costs to adopt MTD-compliant software and train staff. In addition some smaller businesses
or sole traders, may need help navigating new technologies.
What are the approved software platforms to use in order to comply with MTD?
To comply with the UK’s Making Tax Digital (MTD) initiative, businesses must use software approved by HMRC for keeping digital records and filing VAT or Income Tax Self-Assessment (ITSA) returns. Here are some examples of HMRC-approved digital platforms:
1. QuickBooks Online: A widely used solution for businesses of all sizes, offering integrated tools for managing finances and filing MTD-compliant tax returns.
2. Xero: A popular cloud-based platform designed for small businesses, which allows seamless VAT submissions in line with MTD requirements.
3. Sage : Includes various products like Sage Business Cloud Accounting that cater to MTD compliance while simplifying bookkeeping and tax submissions.
4. FreeAgen : Tailored for freelancers, small businesses, and accountants, this platform integrates tax reporting with expense tracking.
5.Avalara VAT Reporting : Specifically focused on VAT compliance for MTD, Avalara’s tools support businesses managing complex tax requirements.
You can find the full list of HMRC-compatible software options for MTD compliance on the official HMRC site:
https://www.gov.uk/guidance/find-software-thats-compatible-with-making-tax-digital-for-vat
Each solution has its strengths, so selecting one depends on your business’s specific needs, such as complexity, scale, and whether you need features like multi-agent support or detailed reporting. Our business accounting team have experience in using HMRC approved digital platforms and will be able to advise you of the most appropriate system for your business as well as support you with the implementation and using of the system.
If you need advice on making your business compliant with MTD and systems to support this please contact Graham Cook at Jarem.
