What is MTD and does it affect me?

Crunch: Making Tax Digital - how will affect me - image of man writing on stack of paper

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    Making Tax Digital (MTD) is the government’s plan to transform the tax system and move it online. MTD was brought in for all VAT registered businesses from April 2019.

    We’ve put together a Making Tax Digital content hub for businesses with the information they need plus Q&A’s.

    This article covers some of the background to MTD and our opinion on what might be next in HMRC’s plans.

    MTD – A brief explanation.

    Since 1st April 2019, VAT registered businesses have had to keep their VAT records digitally, and automatically submit their VAT returns to HMRC through ‘MTD compatible software’.

    If you’re VAT registered, or close to the VAT threshold, and you don’t currently use a digital accounting package (such as Crunch) to record your VAT information, then you need to ensure you’re ready for MTD now.

    How do I get ready for Making Tax Digital for Business?

    As we mentioned above, VAT registered business above the VAT now have to report and pay any VAT due quarterly and ensure their records are stored digitally and sent to HMRC using MTD compliant software. The days of just using excel spreadsheets or actual books are over!

    The dates for introducing MTD for further taxes including Corporation Tax for limited companies, and Income Tax and National Insurance for sole traders have been put back repeatedly and it’s not sure when they may be introduced.

    The most recent update from HMRC was the ‘Making Tax Digital for Business Stakeholder Communication Pack’ in July 2018. This confirmed HMRC had opened an MTD pilot for Income Tax for sole traders with income from one business, or landlords who rent out UK property (excluding furnished holiday lettings).

    The pilot allows people who meet the criteria to voluntarily use MTD compliant software to keep their business records digitally and send Income Tax updates to HMRC quarterly, instead of filing an annual Self Assessment tax return. Users of the pilot will receive an estimate of their tax liability throughout the year. At the moment, the system isn’t able to be used by those with more complex Self Assessment returns.

    Stumped by Self Assessment? Grab this guide

    Businesses, sole traders and limited companies, with turnover above the VAT threshold (£85,000 per year for the 2020/21 tax year), now have to store and submit their records digitally.

    How do I prepare for Making Tax Digital?

    If you aren’t a Crunch client and your business is VAT registered, you can catch up with our recent 15-minute webinar and Q&A on Making Tax Digital. Our experts answered questions and explained what actions you need to take to be prepared for the new MTD reporting requirements.

    You can view or download the Making Tax Digital webinar slides here.

    Making Tax Digital - Our analysis

    Of course, change can be a worry, but in our analysis, the initial VAT element of MTD for businesses isn’t going to be much of a bother for the vast majority of affected businesses. If businesses haven’t started to use approved software to store and submit VAT information to HMRC, they’ll need to start making plans to do so ahead of 1st April 2019.

    Many people are worried about what additional plans HMRC have for MTD. Others are concerned about the added complexity this all might introduce for their business, or the adverse impact on cash flow with tax payments due sooner. If HMRC extended MTD to include personal tax information, this would affect the 10 million people who currently submit an annual Self Assessment return. So it’s perhaps unsurprising the government has delayed implementing MTD more widely for the time being.

    Far from introducing more paperwork, we think these potential changes are a welcome modernisation of the UK tax system. In fact, it’s just catching up with where tax should be. Many UK businesses already report VAT quarterly and pay it soon after filing. In much of Scandinavia and Central Europe, digital tax accounts with monthly or quarterly filing have long been the norm, as has been paying tax more quickly.

    We believe that little and often in terms of tax filings is preferable to an annual process. HMRC’s roadmap initially set out their plans to connect the many systems they use far more effectively, with more information pre-populated when returns are requested. Although this has largely been put on hold, we still believe this new arrangement will result in less time and effort to prepare and file tax returns for business owners and individuals.

    Ultimately, if you’re using online accounting software like Crunch to manage your business accounts, then you’ll see little difference. Crunch will integrate with whatever new technology HMRC introduces, whilst continuing to give you a live view of your tax position as we always have. As long as you keep putting your invoices and expenses into the system, online or using our apps, all will be well.

    Crunch will continue working to ensure all of our knowledge and experience about small businesses is fed into HMRC’s future development of MTD.

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