Making Tax Digital - Deadline Extended until 2022
Making Tax Digital was launched in April last year, but for smaller businesses the deadline has been extended until 2022.
What are the changes?
Back in April 2019, HMRC launched its first phase of its new digital tax initiative, Making Tax Digital (MTD). However, it recently announced its plan to extend the programme for the UK’s smallest companies to April 2022. Here we look at the details.
The current rules
Since last year, most VAT registered businesses with a taxable turnover of £85,000 plus have had to maintain digital VAT records. They’ve had no choice in doing so, and tax returns must also have been submitted via MTD compatible software.
Will this still be the case going forward?
At the moment, for larger businesses the answer is yes. From April 2022, all businesses that are registered for VAT must keep their VAT records in digital form as they do currently. They can use any software they wish for this purpose, including a combination of spreadsheets and packages. However, if spreadsheets are used, the software must be able to extract the relevant information from them electronically, and be able to pass it on to HMRC without any manual adjustment. The VAT payment deadlines will also not change.
Income tax changes after the 6th April 2023
The Making Tax Digital rules will apply for Income Tax Self-Assessment (ITSA) from April 2023 for landlords and unincorporated businesses with total property or business income that exceeds £10,000 a year.
Every quarter, landlords and businesses paying income tax according to MTD will need to submit their income and expenses to HMRC using software that is MTD-compatible. This will generate an estimated tax calculation, which will form the basis for their budgeting for tax payments. This estimate will be based on the information entered. It will not be subject to any tax-relievable payments (pension contributions or gift aid for example) or any tax due on other income, for instance from capital gains or investment income derived elsewhere.
Why is a fully digitalised tax system beneficial?
Making Tax Digital is not really a new thing; HMRC have had it in the pipeline since 2017. Feedback given since last year has been relatively positive, with users perceiving a more streamlined way of dealing with their tax affairs.
Given the combined challenges of both coronavirus and Brexit, small businesses and individuals have also welcomed the extension to timescales as there’s now more time to prepare. Many also feel that a pandemic-related switch to remote working make MTD more of a natural progression which they’re likely to embrace over the coming 18 months.
Are your clients self-employed small business set-ups, landlords or freelancers?
If your clients are self-employed and operating smaller enterprises that are under the VAT threshold, now is the time to act. Although 2022/23 is still some time away, becoming familiar with MTD and the required software should not be left to the last minute. Encourage them to plan ahead, and be aware of the challenges they may face in doing so. Also, any client who is just setting out as self-employed should be encouraged to engage in digital tax recording and submission from the outset. This will avoid them having to switch over later on.
What other benefits are there to Making Tax Digital?
Although switching to a new way of doing things can be negatively perceived, many businesses have actually relished the benefits MTD has yielded. HMRC feedback has shown that early adopters have reported:
The chance to cut down errors and save time
Modern, cloud-based accounting packages now come with some easy to use, time saving features. Xero is a particularly popular one (our Tax Cloud portal is compatible with it too), and features include:
Raising sales invoices on the go
This can be done using the dedicated mobile phone app
These can allocate transactions allowing for automatic VAT claiming depending on bank statement descriptions
Bank feeds give the opportunity to download transactions from your bank account overnight automatically. They’re then ready for the next morning, providing an up-to-date financial overview
Submitting VAT returns directly from the accounting software
So you don’t need to log into the HMRC website and start laboriously keying in information
This feature allows business owners to scan invoices or take a picture of them before automatically uploading them to the system. This means no more missing invoices or fiddly bits of paper. Note, this is also extremely useful for when your client comes to claim R&D Tax Credits too.
Availability of real time information
Real time information means users can see the exact status of their business as it is right now. It allows the chance for more accurate decision-making, avoiding any nasty surprises. Cash flow can also be monitored, leading to more efficient spending.
Cloud-based accounting systems such as Xero are also accessible from anywhere. This means that as your client’s accountant you can access their information much more easily, therefore offering more tailored financial advice.
Financial information anywhere, any time
As mentioned above, a cloud based accountancy system that complies with Making Tax Digital is unlike traditional desktop software which can only be installed on one local computer. Being cloud-based, information can be accessed from anywhere with an internet connection and on any device. Again, this means you and your clients can access up-to-the-moment information which is easily sharable, so they (and you) can react quickly to issues as they arise.
Contact the R&D tax experts at Myriad Associates
There’s no doubt that Making Tax Digital has been, and will continue to be, a seismic shift in accounting and record-keeping practices for many businesses. Although this extension until 2022 has given smaller businesses a chance to get prepared, it’s still something that you as their accountant will likely need to guide them through.
If you wish to find out more about anything related to R&D tax relief, particularly in relation to MTD, and how you can help your clients to claim then do get in touch today. Our expert consultants have worked with accountants throughout the UK and Ireland to provide the most comprehensive R&D tax and grant funding service, and we’ll be pleased to offer advice.