WHAT IS MAKING TAX DIGITAL? THE MUST-READ GUIDE FOR BUSINESS OWNERS
When the government announced plans to make tax digital back in 2015, it seemed like a really long way off.
But as the start date looms ever closer, there’s never been a better time to find out what it is and how it will affect your business.
In this definitive guide, we’ve pulled together all the key information and answered the most commonly asked questions.
You’ll find out what Making Tax Digital is, when it starts, who has to use it and how you can prepare for the big switch over.
So let’s dig in.
What is Making Tax Digital ITSA?
Making Tax Digital Income Tax Self Assessment – or MTD ITSA as it’s also known – is a new way of reporting your earnings to HMRC.
When it comes into effect in April 2024, 4.2 million businesses in the UK – including self-employed people, landlords and individuals in partnerships – will have to use government-approved software to record their finances and submit them to HMRC every three months.
The government says the new system will make it easier for businesses and individuals to pay their taxes and keep on top of their finances.
It’ll also save the treasury millions of pounds currently lost to inaccurate accounting.
Who has to use making tax digital?
Making Tax Digital applies to all self-employed people, landlords and individuals in partnerships with an income of more than £10k per year.
According to the government’s website: ‘This includes around 2.6 million self-employed individuals, around 1 million landlords, over 250,000 ordinary partnerships, and about 380,000 businesses with income from different sources (for example, both self-employment and property).’
When is Making Tax Digital coming in?
MTA ITSA was originally due to come in April 2023 but, due to the pandemic, the start date was pushed back a year.
Self-employed people and landlords will be legally obliged to use MTD ITSA from April 2024, while individuals in business partnerships will start using it in April 2025.
What is the threshold for making tax digital?
Everyone who is self-employed and has an income of more than £10k per year is eligible to pay tax via MTD.
Once the system becomes law in April 2024, it’ll be compulsory to use it and you won’t be able to opt out or submit your tax returns any other way.
What does Making Tax Digital involve?
In a nutshell, when MTD comes into effect, you’ll have to submit your financial records to HMRC every three months using MTD compatible software.
You’ll also have to send a final end of year report, at which point your tax bill will be calculated for you.
What software is required for Making Tax Digital?
To use MTD ITSA you’ll need a government-approved automated software system, such as Sage, Xero and Quickbooks.
Some software systems will have free versions you can use – or if you decide to upgrade, you can offset the cost against your profits which will reduce your overall tax bill.
When to sign up for Making Tax Digital ITSA
General registration for MTA ITSA isn’t open yet because the government is still carrying out a pilot scheme.
You might be able to join the pilot through your accounting software.
What you’ll need when you sign up for Making Tax Digital ITSA
When registration opens you’ll need:
- A Government Gateway account, user ID and password – If you usually submit your tax return online, you’ll already have one of these
- Your business name
- Your business start date or the date you started collecting property income
- An email address
- Your National Insurance number
- Your accounting period dates
- Your accounting type – e.g. cash or standard accounting
What are the benefits of Making Tax Digital?
Now for the good news.
There are lots of benefits to using MTD ITSA. They include:
- Saving up to a day week in admin by switching to digital accounting*
- No more paperwork cluttering up your office space
- A better day-to-day overview of your business finances
- More time to focus on looking after your customers
- Less chance of getting your taxes wrong – in other words, less stress and less likelihood of fines or hours of painful calls to HMRC
- It’ll be easier to submit tax returns and keep track of how much tax you’ll need to pay
* According to the Lloyds Bank UK Business Digital Index 2019, using digital channels saves small businesses, on average, a day a week in administration.
How to get ready for Making Tax Digital?
The best way to get ready for MTD is to start using digital accounting software now with Angel Bookkeeping & Payroll Services.
The sooner you switch, the more time you’ll have to get used to it before MTD ITSA becomes law in April 2024.
Plus, it’ll make your annual tax return quicker and easier too.
Are MTD ITSA and MTD VAT the same?
No, MTD ITSA and MTD VAT are different.
If you earn more than the annual £85K VAT threshold, you’ll have to submit MTD VAT and MTD ITSAs.
You can find out more in our blog, What is Making Tax Digital VAT? Everything business owners need to know.
How we can help you get ready for MTD ITSA
We understand that you might be feeling a little overwhelmed at the thought of submitting your tax return five times a year. But there’s no need to worry – the team at Angel Bookkeeping & Payroll Service is here to help.
Please call Aggie on 07867 129210 if you have any questions or if you’d like us to take care of MTD ITSA for you.