In a recent announcement, the government revealed revised implementation dates for Making Tax Digital for Income Tax Self Assessment (MTD for ITSA). This change aims to give businesses and self-employed individuals more time to prepare for the digital shift in tax reporting.

New Deadlines:

• April 2026: From 6 April 2026, self-employed individuals and landlords with business or property income over £50,000 will have to use MTD for ITSA.
• April 2027: From 6 April 2027, those with incomes over £30,000 will be required to join MTD for ITSA.
• By the end of this Parliament: income over £20,000 will be added (although there is no date set)

What if You Earn Under £20,000?

MTD for ITSA is not mandatory for those with business or property income below £20,000. The government is still reviewing whether to include this group in the future, but for now, you can continue with your existing Self-Assessment process.

What is Making Tax Digital?

Making Tax Digital (MTD) for Income Tax is a significant change in how self-employed individuals report their income to HMRC. Essentially, it moves the tax system into the digital age. Instead of filing an annual Self Assessment tax return, you’ll need to use MTD-compatible software to keep digital records of your income and expenses and send quarterly summary updates to HMRC.

This means you’ll have a more real-time view of your tax liability throughout the year. At the end of the tax year, you’ll submit a final declaration through your software, confirming that the information you’ve provided is accurate and complete. This shift aims to reduce errors, make it easier to stay on top of your tax affairs and simplify the tax process for self-employed people.

What Does Making Tax Digital Mean for You?

The delay provides a welcome breathing space, but it’s important not to become complacent. Here’s how you can use this extra time effectively:

1. Familiarise Yourself with MTD: Take the time to understand what MTD for ITSA entails. This involves using compatible software to keep digital records and submit quarterly updates to HMRC.
2. Choose the Right Software: Research and select MTD-compliant software that suits your business needs. Many options are available, so explore different features and pricing plans.
3. Get Organised: Start organising your financial records digitally. This will make the transition to MTD smoother when the time comes.
4. Seek Professional Advice: If you’re unsure about any aspect of MTD, don’t hesitate to consult an accountant or tax advisor. They can provide valuable guidance and support.

Benefits of Making Tax Digital for Income Tax Self Assessment:

While the transition to MTD might seem daunting, it also brings several benefits:

• Real-Time Information: You’ll have a clearer picture of your tax position throughout the year, helping you budget and plan more effectively.
• Reduced Errors: Digital record-keeping minimizes the risk of manual errors, leading to more accurate tax returns.
• Simplified Processes: MTD streamlines tax reporting, making it less time-consuming and stressful.

Conclusion:

Although the MTD for ITSA deadlines are in the future, it’s crucial to start preparing now. Use this time wisely to get organised, choose the right software, and ensure a smooth transition to the new digital tax system. Remember, embracing MTD is not just about compliance; it’s about harnessing technology to improve your financial management and make tax season less taxing.

Additional Tips:

• Stay Informed: Watch for further updates from HMRC regarding MTD for ITSA.
• Test Your Software: Once you’ve chosen your software, use it to familiarise yourself with its features and ensure it meets your needs.
• Don’t Panic. The shift to MTD is a gradual process. If you encounter any difficulties, contact HMRC or seek professional advice.

Remember, the key is to be proactive and prepared. By taking action now, you can ensure a seamless transition to Making Tax Digital for Income Tax Self Assessment and reap the benefits of digital tax reporting.

The post Making Tax Digital for Income Tax Self-Assessment appeared first on Business Accounting Basics.

When filing your tax return, there are several things to consider. You must accurately report your income and any expenses incurred during the year. This includes wages, pensions and income from investments and other sources. You must also declare any deductions taken against your taxable profits and calculate how much capital gains tax is due on any investments you have sold.

This article will outline the different aspects of completing a tax return for self-employed individuals, whether you are a sole trader or in a partnership. We’ll explain what information you need to provide, how you can calculate your taxable profits and the different ways of paying tax.

Who Needs to Complete Self-assessment Tax returns?

You must complete a return if you are self-employed as a sole trader and have earned more than £1000 before taking off any deductions.

This also applies to landlords renting out a property, people with untaxed income such as tips or foreign income, or those with investment and savings income that is not already taxed at source.

If you are in a partnership, you must complete an SA800 tax return and a self-assessment tax return SA100.

Self Assessment and MTD

The government is introducing a tax system called making tax digital (MTD). This means that self-employed individuals and landlords must keep digital records of their business transactions. These records can then be used quarterly to submit taxes through an approved software solution.

The introduction dates are from 6th April 2026 with an income over £50,000 and April 2027 with an income over £30,000. The income includes both business and property.

Can I Complete my Own Tax Return?

Yes, you can complete your own tax return as long as you are confident in correctly understanding the information and how to report it. However, if you have any doubts or concerns, it is advisable to seek professional advice from accountancy membership organisations UK.

An accountant can provide expert advice on tax planning strategies that may save you money and ensure that all deductions and allowances are claimed, which may reduce the amount of tax due. They will also be able to keep track of all changes in legislation so that your returns are updated accordingly.

Tax Return Software

There are several providers of tax return software which make completing a tax return simpler and more efficient. The software will guide you through entering your financial information, calculating the amount of your tax bill, and then generating a completed return for you to submit to HMRC.

The software is generally very user-friendly and allows you to enter information at your own pace. It will also provide information on deductions and allowances to which you may be entitled, which can reduce the amount of tax due on your return.

In the future, most accounting software packages will include the feature to submit tax returns under Marking Tax Digital.

How to Register for a Self-Assessment Tax Return

To register for self-assessment, you will need to sign up with HMRC and get a government user ID. You will then be sent a 10-digit Unique Taxpayer Reference (UTR) number, which must be kept safe and used when filing a tax return. If you can’t sign up online, you can phone them.

Once registered, you will receive an annual tax return form to complete online. This will detail your income and deductions for the past year alongside any other information HMRC need to calculate the amount of tax you owe.

It is essential to ensure all information on your tax return is accurate, as any mistakes can lead to an investigation and potential fines.

What is the self-employment tax Year?

The self-employed tax year runs from 6th April to 5th April the following year. Any income earned between these dates must be reported on your tax return.

The deadline for filing a paper self-assessment tax return is 31st October, or if you file online, it is by midnight on 31st January following the tax year end.

How to Complete a Self-Employed Tax Return

Gather all the Information for the tax year

The process for completing a self-employed tax return is straightforward. Firstly, you will need to gather all the information required by HMRC, including the following:

• Self-employed income and expenses
• Rent received
• Employment income
• Income from overseas
• Pensions payments and income, including any state pension
• Certain benefits income if it is taxable
• Investments
• Gift Aid donations
• Capital gains or losses from selling assets
• Student Loans

Check your Personal Details

The next stage is to check your personal details, including name, address, National Insurance Number and date of birth. If any details are incorrect, you can change them now.

Complete the Sections that Apply to You

When completing the Self-Assessment Tax return online, it will guide you through the complete process. You start by deciding which sections are relevant to you.

The process will then guide you to complete each section that is needed.

Tax Calculation

Once you have completed all the required sections, HMRC’s online system will calculate your self-assessment tax return. It will also provide a breakdown of your tax credits, deductions and allowances.

Submit Your Return

Once you have carefully checked the correct details and all information has been included, you can submit your self-assessment tax return. This is usually done by submitting the completed form online via HMRC’s secure website.

Keep Records

It is vital to keep a copy of your tax return, as you may need it in the future for reference. HMRC may also request copies of any relevant information when conducting an audit.

You will also need to keep all the records that relate to your tax return for at least five years after the 31st January submission date. The records include bank statements, invoices, bills, bank interest statements, pension records, and other related paperwork.

How to Calculate Self-Employed Income and Expenses

Calculating your income and expenses can initially seem daunting if you’re self-employed. However, with the help of your bank statements, invoices, and any other relevant documents you may have, it doesn’t have to be as difficult as you might think.

Bank statements will show any money entering and leaving your accounts – this is the easiest way to determine how much money you have made during a period. Make sure to keep a record of invoices sent out for work done so that they can be counted towards your income.

Track all your business-related allowable expenses, such as payments for goods, services, utilities and supplies.

On the tax return, there are two ways to record the business’s expenses; if the turnover is below £90,000 from 2024, you can enter the total expenses. For turnover above £90,000, you are required to enter the individual expense amount.

These records will help produce an income and expenses report and a balance sheet. These figures are used in your self-assessment tax return. There are several different ways to record the transactions for the tax year, including:

Accounting Software

Using accounting software such as Xero, FreshBooks, Sage, or QuickBooks will help you keep up with your self-assessment tax return. These packages usually come with inbuilt features and services that allow you to track income, expenses and payments easily.

They include features that make it easier to record transactions and run your business, including:

• Importing bank transactions
• Reconciling accounts
• Producing accurate reports
• Receive payments online
• Professional Invoices
• Tracking stock
• Calculating wages

Excel Bookkeeping Templates

For those not comfortable using accounting software, it is possible to use an excel bookkeeping template. This will allow you to record income and expenses using a spreadsheet. It may be helpful for small businesses or freelancers with low turnover.

At Business Accounting Basics, we have produced over 25 free bookkeeping templates to assist with different accounting aspects like cash book, profit and loss, accounts receivable, sales invoices and lots more.

Ledger Book

For those who prefer a more traditional approach, you can record your transactions using a ledger book. This involves entering all transactions into the appropriate columns and sub-divisions. It is essential to keep the ledger book up to date so that it remains accurate.

Once all entries have been recorded at the end of the tax year, your ledger book should be able to produce an income and expenses report. This will provide the information needed for the completion of the self-assessment tax return.

If you’re unsure how to calculate your self-employed income or expenses for a tax return, it is recommended that you seek professional advice from an accountant.

How much Tax do I have to Pay?

Once your self-assessment tax return has been received and processed, you will receive a statement of how much tax and National Insurance is due or if there is a refund due to overpayment.

To check your payments due, sign into and view your account. It will show a breakdown of payment amounts and dates.

Income Tax Rates for Self Employed

The tax you will pay depends on the total income for that particular year. Income tax rates are set by HMRC and are applied to different levels of taxable income.

For the 2023/2024 financial tax year, the self-employed tax rates for single :

Personal allowance up to £12,570 is tax-free.

£12,571 to £50,270 is 20%, the basic rate of tax.

£50,271 to £150,000 is 40%, the higher rate of tax.

Over £150,00 is 45%, called the additional rate. it will be lowered to £125,140 from 6th April 2023.

If you earn over £125,140, you will not receive a personal allowance. For earnings over £100,000, for every £2 earnt, £1 will be withdrawn from the personal allowance.

Class 2 National Insurance Contributions

Class 2 NI is paid if profits are more than £12,570 for the tax year 2022/2023 and are calculated at £3.45 per week.

Class 4 National Insurance Contributions

Class 4 NI is paid if profits are £12,570 or more a year. There are two different rates:

9% on profits between £12570 and £50,270

2% on profits over £50,270

Self Assessment Tax Calculator

You can use the online self-assessment tax calculator to check how much tax and NI you may be liable to pay for the tax year. This will give you an estimate of your tax liability based on the information you enter. The tax calculator is only suitable for calculating self-employed income; it does not include income from other sources.

This tax calculator works on Self-employed only up to £100,000.

What are Payments on Account?

Payments on the account are payments of estimated tax due based on the previous tax year before submitting your self-assessment tax return. You will have to make a payment on account if your previous tax bill was over £1,000.

Payments on Account are 50% of the previous year’s tax bill; the first payment is due by 31st January, and the second payment is due by 31st July.

Self Employment Tax Deadlines

As self-employed, there are several tax deadlines that you must be aware of.

If you are newly self-employed, you must register for self-assessment by 5th October on your second trading tax year. For example, if you started self-employment In June 2022, you must register by 5th October 2023.

31st January is the deadline for submitting your self-assessment tax return and making any payments on account and final payments.

31st July payment on account for the tax year.

If you have missed these deadlines, it is important to contact HMRC as soon as possible to inform

How do I pay my Self-Assessment Tax Bill?

There are several ways to pay your tax bill; whichever method you use, you will need to leave enough time for the payment to clear by the deadline. The options to pay tax are

• Online or telephone banking
• CHAPS
• Debit or credit card – there is an additional charge for using business credit cards
• At a bank or building society
• BACS
• Cheque by post
• Direct Debit

Once payment has been made for your tax bill, it is always worth checking it has been received by using your online account.

Budget Payment Plan

It is also possible to set up a weekly or monthly payment plan. To set up a payment plan, you must access your online account and follow the instructions to set up a direct debit.

Late Payments for your Tax Bill

If you fail to pay on time, HMRC will impose a late payment penalty. The penalty amount depends on how late the payment is; you will also be charged interest. If you cannot pay your full tax bill, contacting HMRC as soon as possible is important.

Self-Assessment Return Conclusion

Self-assessment tax can seem daunting and complicated, but you can easily manage your taxes with the right knowledge. Knowing when to register for self-assessment, how much income tax you’ll owe based on your total profits, understanding payments on account, and deadlines are all crucial steps in filing a successful self-assessment tax return.

With so many different ways of paying tax, such as online banking or direct debit, it’s easy to ensure everything is handled before the deadline.

Finally, if there are any problems related to filing or paying your taxes, don’t hesitate to contact HMRC for help – they have experienced advisors who can assist you quickly and efficiently.

Disclaimer

The content provided on this page is for informational purposes only and should not be considered tax advice. You should always speak to a qualified professional before making decisions concerning your Self-Assessment return.

The post Tax Returns for Self Employed appeared first on Business Accounting Basics.

In this blog post, we will explain everything you need to know about VAT so that you are up-to-date on the rules and ensure compliance. From tax rates to registration thresholds, find out all the key facts, so your business benefits from complying with relevant laws.

What is Value-Added Tax (VAT)?

Value-added tax is a taxation that businesses must add to their sales if registered. VAT is collected by businesses from customers and then paid directly to HMRC. We all pay VAT on goods and services we purchase, but sometimes you do not realise that you are being charged for it as it becomes part of the price.

VAT is a consumption tax, which is a tax based on how much goods or services you consume. The more you consume, the more you will pay.

How does VAT work for small businesses in the UK?

Value Added Tax (VAT) is something that small businesses need to think about. It is a tax that people have to pay when they buy most goods and services. VAT is calculated as a percentage of the overall sale price and must be collected and paid to the government.

Businesses that make sales and are over the VAT threshold must register with HMRC and charge VAT on goods or services they sell. At the same time, any registered business that pays out for goods/services reclaims the VAT on purchases on their VAT return.

Knowing how VAT works for small businesses can help ensure your business complies with taxes, giving you peace of mind when running your business.

How can small businesses claim back VAT they’ve paid on business expenses?

VAT-registered businesses reclaim VAT by completing a quarterly VAT return. This means businesses pay the net balance of VAT due or repay any overpaid VAT.

When claiming back VAT, businesses must keep all receipts and invoices for six years for audit purposes. HMRC can conduct a tax audit anytime, so maintaining good records is essential.

If you are a startup on your first VAT return, you can reclaim VAT on business expenses incurred up to four years before registering for VAT. It includes reclaiming services like legal fees to get the business running and capital expenses, including computers and other equipment.

The benefits of registering for VAT

Registering for value-added tax (VAT) is a great way to stay compliant with the applicable laws in your country or region. By registering for VAT, you can reclaim the amount of input VAT on most business expenses, such as materials and services. For some businesses, if you have made a large purchase, for example, new equipment or stock, you might be due a refund.

Some businesses will only deal with VAT-registered companies, allowing them to reclaim the VAT on the purchases of goods and services.

Disadvantages of Being VAT Registered

Although if you have reached the VAT threshold, you must register for VAT, there are also times when you can register voluntarily. Voluntary VAT registration might seem like a good idea, but there are some disadvantages.

• Administration – As a VAT-registered business, you must complete quarterly VAT returns and keep up-to-date records of all transactions.
• Higher Prices – If you are registered for VAT, you must charge it on all taxable sales and services. This can make your products or services more expensive, which could put customers off.
• Cash Flow – When you are registered for VAT, you must pay the amount of tax collected to HMRC within 1 calendar month and 7 days. You must, therefore, ensure that the money is available.

What is the VAT Threshold?

If you’re a business owner in the UK, it’s essential to be aware of the VAT threshold so that you register on time. The VAT threshold is £90,000, and it applies if, by the end of any month, your total VAT taxable turnover for the last 12 months was over this amount. You must register within 30 days of the month that you go over the threshold.

If the business exceeds the threshold temporarily, it is possible to request an exemption from HMRC. You must write to HMRC with evidence showing that you do not expect to go over the deregistration threshold of £83,000 in the next 2 months.

Failing to register when your profits reach this threshold could mean paying hefty fines or penalties.

How to register for VAT

For businesses with VATable turnover, to register, you’ll need a Government Gateway user ID and password, and you can usually do it online within minutes. Upon registering, you’ll also get access to your VAT online account.

Alternatively, you may appoint an agent to submit VAT returns and other dealings with HMRC on your behalf. If you use an agent, you can still register for an online account after receiving the VAT number.

When you are registered for VAT, you will receive a VAT registration certificate and details of when the business is registered from and when you need to start charging VAT on your goods and services. The VAT certificate includes the VAT registration number.

VAT and Making Tax Digital

Joining the rest of Europe, HMRC’s Making Tax Digital (MTD) program was introduced to help make tax returns easier for UK business owners. As such, MTD requires VAT returns to be electronically submitted via accounting software compatible with the program.

It is important to note that using this accounting software does not mean you cannot access any vital information about your return; it just helps streamline the process and provide more convenient access. It is also noteworthy that filing a VAT return with HMRC through any other means is no longer possible due to the introduction of MTD unless you have an exception.

UK VAT Rates Explained

VAT rates are divided into four categories: standard, reduced, 0% and exempt.

It’s worth taking the time to understand which VAT rate applies to what you’re buying or selling. That way, you can ensure you meet all the necessary obligations regarding VAT tax rates in the UK. A complete list of VAT rates is on the HMRC website.

VAT Calculation Example

There is a simple formula that you can follow for each VAT rate. You multiply the VAT exclusive price by 1 + the VAT rate divided by 100. Below are the simple formula and examples using 200.

20% Multiply by 1.2 = 240

5% Multiply by 1.05 = 210

If you remember this formula, it is much easier to calculate the VAT-inclusive price.

VAT Calculator

To make it easier to work out the VAT, we have created 2 VAT calculators. The first is for VAT-inclusive prices; when you enter the inclusive amount and VAT rate, it will calculate VAT-exclusive prices. The second is the opposite way, enter the VAT exclusive, and it will calculate both the VAT and the price excluding VAT.

What are the UK VAT Schemes

Different VAT schemes are available depending on the size and type of business in question. Below is a brief description of each scheme:

Standard Accounting Scheme

The main scheme is for standard VAT for larger businesses. The VAT is calculated when you invoice someone or receive a bill from a supplier.

Flat Rate VAT Scheme

Small businesses can simplify their VAT affairs by opting for the flat rate scheme – wherein a preset percentage is applied to all income regardless of expenditure outlay. Each business pays a fixed rate of VAT, depending on the type of business. You still charge VAT at the standard rate on all the goods and services provided.

Cash Accounting Scheme

The cash accounting scheme allows businesses to pay VAT on goods or services when they receive payment from customers and claim it back when they pay their suppliers. This scheme is suitable for businesses with lower turnover.

Annual Accounting Scheme

The annual accounting scheme is for businesses with a turnover below £1.35 million. You submit one VAT return yearly rather than four and make payments in advance.

Marginal Scheme

The marginal scheme lets you calculate the VAT on the value you added to goods you resell. This scheme is mainly for second-hand goods, antiques and collector items.

Record keeping and submitting returns for VAT registered Businesses

Accurate record-keeping is one of the most critical tasks for any VAT-registered business. This means keeping detailed records of all transactions that are subject to VAT. This includes all invoices and receipts for all goods and services. The best way to keep accurate records is by using accounting software or engaging an accountant’s services.

These records must be kept for at least six years if HMRC requests them for inspection or an investigation into your business.

A VAT return must be submitted every three months by any business that is registered for VAT (unless you are on the annual scheme). The return is submitted via accounting software or bridging software; all VAT returns are now completed electronically.

VAT returns are due 1 month and seven days after the VAT quarter. For example, your VAT period is from 1st January to 31st March, and your return is due on 7th May.

What information must I include in a VAT invoice?

For VAT-registered companies, specific details must be included on the invoices.

You should include the following:

• A unique invoice number that will identify the document
• The date of supply
• Date of issue for the document if different to the date of supply
• Your business name, address and VAT registration number
• The customer’s name and address
• A full description of the goods or services provided, quantity, unit price and VAT rate
• The total amount charged for the goods/services, including any discounts given
• The total amount of VAT charged
• Gross amount of the invoice
• The reason for any zero or VAT-exempt items

To ensure that an invoice shows all of this information, it is recommended to use accounting software. HMRC have a complete list available.

VAT Direct Debit

If you want peace of mind that your VAT bill will be paid on time, it is possible to set up a direct debit. To ensure payment is taken, it must be set up 3 working days before you submit the VAT return online.

The direct debit will be taken 3 working days after the payment deadline or, if it is filed late 3 days after the return is filed.

Common mistakes made by small businesses with VAT

Some of the most common mistakes for VAT are:

• Not registering for VAT when the requirement to do so arises
• Charging customers the wrong rate of VAT or not charging any at all
• Not being able to account for all of the VAT charged and paid
• Not keeping accurate records
• Late submission of returns
• Late VAT payments

What is the Difference between VAT Exempt and Zero Rate VAT

VAT-exempt items are those goods and services that are not subject to any rate of VAT. This includes some healthcare services and educational fees.

Zero-rate VAT is applied to certain items that would usually have VAT, but it is set to zero. This includes children’s car seats and books.

VAT Penalties

Missing a VAT return or payment deadline can be stressful, especially if it is a busy time for the business.

If you’re late in sending your return, you will start a 12-month surcharge period. There is nothing to pay for the first late return, but you may have to pay a surcharge on other late returns.

Late VAT payments may also be charged interest. HMRC will let you know how much you need to pay in surcharges and VAT.

VAT FAQ

What is Input Tax?

Input tax is the amount of VAT that a business has paid to its suppliers on purchases. This can then be claimed back from HMRC when your business submits a VAT return.

What is Output Tax?

Output tax is the amount of VAT that is charged to customers when goods and services are sold. This is collected by the business and then passed to HMRC when a VAT return is submitted

What is the tax period?

The tax period is the length of time between two successive VAT returns and can be up to one year; most businesses have a 3-month tax period.

Can I claim a tax refund?

Yes, if your business is VAT registered and you have paid more than you received in the same period, you can claim a tax refund.

How does VAT work? Conclusion

In order to ensure accuracy in your tax reporting and to stay compliant with HMRC regulations, it is important to understand the basics of VAT.

This includes understanding when to register for VAT, what goods and services are subject to VAT, the different rates that can apply, and what information must be included on invoices. It is also advisable to familiarise yourself with common mistakes businesses make regarding VAT and how to set up a direct debit for payment.

Finally, for any VAT-registered company, always consult an accountant or professional if you have any questions about your business’s VAT obligations.

The post How does VAT Work for Small Businesses in the UK? appeared first on Business Accounting Basics.

ITSA is Income Tax Self Assessment.

In this article, we will look at the following:

• What is Making Tax Digital (MTD)
• Making Tax Digital Deadlines
• The plans for Income Tax Self Assessment
• Why the delay?
• How to comply with MTD

What is Making Tax Digital?

Making tax digital is part of HMRC’s policy to get all businesses to file tax records digitally. The idea is that in time the whole system will be paperless.

Small Businesses are required to keep digital records and use third-party software to submit tax returns to HMRC.

MTD for VAT was introduced in April 2019 for VAT registered businesses over the threshold of £90,000.

The reason for introducing MTD is to:

• Reduce errors in business accounts and therefore reporting is correct for taxation.
• Reduce paperwork.
• Integrate business administration and taxation.

The following accounting packages are all MTD ready:

What are the Making Tax Digital Deadlines?

As a small business owner, it is essential to know any tax deadlines.

Here are the MTD deadlines for both VAT-registered and self-employed

MTD for VAT Deadlines

April 2019, all businesses over the VAT threshold of 90,000 were registered.

From April 2022, small businesses registered for VAT will need to comply.

MTD for Income Tax Deadlines

Making tax digital for income tax was a deadline of April 2023; it is extended to April 2026.

It is for taxpayers with business or property income above £10,000. It will include landlords, sole traders and partnerships.

At the moment, there is no fixed date for all MTD for income tax, but I am sure it will be announced soon.

Making Tax Digital Self-Employed

If your earnings are over £1,000, you need to register as self-employed and complete a self-assessment tax return.

You can also register as a sole trader if your earnings are under £1000. There are a few reasons why you may want to do this, including:

• To claim tax-free child care
• Voluntary contributions to Class 2 National Insurance

Currently, only businesses with business or property income over £10,000 will need to be MTD for income tax ready by April 2026.

The easiest way to ensure that you are MTD is to use compatible software.

There are many different options for software, and it is worth taking your time to choose the best accounting software for your small business. Options included both paid and free versions.

The other option is to use bridging software that works with non-compatible software like spreadsheets, accounting systems and other digital bookkeeping products.

It lets you send the required information digitally to HMRC in the correct format.

Making Tax Digital for VAT

MTD for VAT was introduced in April 2019 for businesses over the VAT threshold of £85,000 for taxable turnover; this has now increased to £90,000.

Businesses can opt-in if their business is under the VAT threshold. It is estimated that about a quarter of those under the threshold has opted in. From April 2022, all companies registered for VAT will need to produce digital records.

If you are registered for MTD, the chances are you will file vat returns online through accounting software.

MTD for Corporation Tax

The government is still planning for corporation tax but has suggested it will not start until at least 2026.

It will give small businesses and accountants more time to get ready.

Why the delay?

Over the last couple of years, businesses have struggled to survive due to the Covid pandemic and changes with Brexit.

Businesses are still trying to recover and may have issues with the supply of products to continue work.

With all the stress of running a business, some will be glad of one change they do not need to implement yet.

Is it Worth Getting MTD Ready?

Although, as a business, you do not need to be ready for making tax digital for income tax yet, it is worth spending the time deciding if the company will be better off getting ready.

The reasons for this are:

• Digital records by using software will help businesses make decisions.
• It is easier at the end of the accounting period to produce the reports required.
• Automating the accounts can save time and money.
• Professional branded invoices using a logo.
• Customers can settle bill payments through the software.
• Keeping track of debts.
• Bank feeds are automatic once set up with open banking.
• Accurate digital record-keeping.

Do I need a Bookkeeper or an Accountant for MTD?

Although you do not need an accountant or bookkeeper to complete your tax, they can be an asset to the business.

One of the main advantages is knowing the tax rules and what the business can claim for. It will help to reduce the tax bill.

A bookkeeper or an accountant can take the stress away from completing the accounts and allow you to concentrate on the sales and other admin tasks.

Making Tax Digital Accounting Software

There are lots of options for accounting software, most of which are MTD Compliant.

It is worth taking your time to choose the best accounting software for your small business. Start by making a list of everything you need; this may include:

• Stock
• Time management
• Expense Tracking
• VAT
• Making tax digital
• Invoicing templates
• Mileage
• Departments

We have produced a list of our best accounting software for small businesses. It looks at the best options for different business types.

Our top options for accounting software are QuickBooks, Xero, Ember and Zoho Books.

One free option that some small businesses use is a software called WAVE Apps. Unfortunately, it will not be compliant with making tax digital. WAVE is concentrating on the Canadian and US markets.

A complete list of accounting and bridging software is available on the HMRC website.

Making Tax Digital for Income Tax Conclusion

Self-employed businesses and landlords with a taxable income over £10,000 will need to be compliant with making tax digital from April 2024. The date was April 2023.

VAT-registered businesses with a turnover of over £90,000 are already using MTD to submit VAT returns.

The easiest way to comply with digital tax is through online accounting-compatible software.

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The first phase of making tax digital VAT will come into force from April 2019. HMRC had delayed the date, but they are now working closely with software companies to achieve the new deadline.

Making Tax Digital what does it mean for me?

If your business has income over £85,000 per year, you must register for VAT. All VAT registered businesses over the threshold must use an accounting package to upload their VAT to HMRC’s records from April 2019. At the moment around 71% still log in to HMRC to declare VAT.

What costs are involved?

If your small business already uses an accounting package, check if they are going to meet the deadline. Most of the well-known ones are already on the list including Quickbooks, Sage, Xero, Clearbooks and Quickfile. Each of these packages has a monthly subscription which will vary depending on the size of business, amount of transactions and if you require any add-on features.

For a business not using accounting software the first step would be to talk to your accountant to see if they recommend a package. On the whole, most accountants will be able to use any accounting software, but a few have their favourites. The first step would be to take a free trial to see if the package suits your business needs.

Can I complete MTD VAT Myself?

If you are confident with setting up and using the software, there is no reason why not. Many businesses both self-employed or Limited company run their accounts internally. To ensure you do not get charged penalties, and interest VAT deadlines are important.

Making Tax Digital VAT – Free Software

One of the best free accounting software packages I have used as a bookkeeper is Pandle. I recommend it to small businesses and enterprises as it is fairly easy to setup and use. Pandle are planning to comply to HMRC for making tax digital VAT when it comes into force, but worth checking with support before using it. Pandle offers most of the features that a subscription package has including invoicing, statements, VAT and reports. It has some paid for features which include an automatic bank feed, forecasting and projects.

MTD below the VAT Threshold

If you are below the £85,000, the deadline will not affect you, but it is worth preparing in advance to switch to digital accounting. One of the concerns in the bookkeeper’s forums is that there will be a large influx of businesses needing help to become compliant. Bookkeepers can already have enough clients that they can’t take on any more work.

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Making tax digital for business will start affecting the smaller businesses which are not registered for VAT. It is expected to commence in April 2019. It is still unclear from HMRC if it will include all small businesses or if very small ones will be excluded.

Small companies will have to submit their accounts online to HMRC quarterly, which is in line if you are VAT registered. It is unclear at the moment how this will be done and which accounts software will provide the feature. I would expect that most of the main accounting package providers will be able to submit directly to HMRC, but will need to amend their software.

The government has to still write the legislation and until this is done there are no clear guidelines.

Making Tax Digital for Business – Why do we need it?

One of the main reasons for converting to digital tax is to reduce the amount of errors that are made. HMRC reports that over £8 million is lost in avoidable tax errors.

At the moment small business owners find it difficult to know how much tax and NI they owe until they complete their self-assessment tax return. With the pressure of running a business, they are sometimes not submitted until the deadline. This can then leave the business owner needing to pay the whole figure immediately. Digital tax will mean that you can calculate the figure owed over the course of the year.

Digital Tax should I get ready?

If you are a small business, it may be worth starting to use a full accounting software package like Xero, QuickBooks or Sage. This will allow you to get up to speed with the process of doing your own accounts.

If you have not got the knowledge or time to complete your own accounts then now could be the time to get a bookkeeper or accountant in to help. Bookkeepers can get very busy and may not have time to take on new clients when the digital tax is implemented.

Make sure if you do take on a bookkeeper that they are qualified and have the correct insurance in place. They also need to be covered under anti-money laundry.

Further information can be found on the HMRC website.

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