A Guide to Making Tax Digital

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Making tax digital was the initial step taken by the government of the United Kingdom to lay the foundation in achieving the objective of Her Majesty’s Revenue and Customs (HMRC) in becoming one of the most digitally advanced tax administrations in the world.

Making Tax Digital was a scheme introduced by HMRC to make the filing process more effortless for organisations and individuals. This makes the procedure more systematic and practical, and it also helps attain an accurate tax figure.

The UK government has already introduced VAT and income tax to make the tax digital procedure. The HMRC is also present in the process of introducing Corporation tax to the making tax digital.

Making Tax Digital – Value-Added Tax

It is vital for the VAT registered business organisations with a taxable turnover of more than £85,000 to follow Making Tax Digital for VAT. This law came into effect in April of 2019.

The HMRC introduced a specific set of guidelines regarding the making tax digital procedure for both agents and business organisations.

The guidelines are as follows:

  • Business Organisations – The basic rules that need to be followed by businesses are maintaining VAT records, acquiring compatible software for making tax digital for VAT.

Maintaining VAT records

It is essential for all VAT registered companies to retain records of sales and purchases, prepare a VAT account that acts as a summary for the VAT amounts and issue correct invoices.

Even though all the VAT-registered firms need to maintain the records mentioned above, firms that fall within the VAT threshold of £85,000 should digitally keep some of the above-stated records. Records should be kept for a minimum of 06 years and a maximum of 10 years if the business uses the VAT MOSS service.

If the relevant organisations do not maintain proper documents regarding the company’s transactions, they will be subject to penalties by HMRC.

Acquiring software that is compatible with making tax digital for VAT

Mainly there are two types of compatible software that need to be developed by the relevant firms.

The first software is VAT record-keeping software. This software supports you to update and store information regarding VAT digitally. Also, this software extracts the data and works hand in hand with the HMRC systems.

The second software required is bridging software, which allows you to send and receive data related to VAT between HMRC and incompatible software such as Microsoft Excel, Accountancy software, etc.

  • Agents – Agents could sign up on behalf of their clients for making tax digital for VAT using the same procedure mentioned above. Along with the methods already mentioned above, they will also be requesting authorisation from the client after signing up through the agent services account.

Exemptions

Specific business organisations are exempt from using the making tax digital software. To be considered an exemption, the organisations must fall within at least one of the following categories.

The categories are

  • Any firm, which is already exempt from filing returns online.
  • Any firm whose taxable turnover has not exceeded the threshold level of £85,000 since April 2019.
  • If the business is already in the process of insolvency.

Business owners can also apply for exemptions if they cannot file the VAT returns using the making tax digital due to their age, disability, location, or other logical reasons.

The following information is required to apply for an exemption:

  • Business name and its registered address
  • The VAT registration number
  • Information on how you currently file the VAT return
  • The reason for applying for exemption

Making Tax Digital – Income Tax

Making Tax Digital is a procedure used to disclose an individual’s earnings to HMRC. This process uses specific software, which is compatible with making tax digital for income tax.

It is used to maintain the relevant information digitally and to send updates regarding income tax. It’s an alternative method to file a self-assessment tax return on an annual basis.

It is essential to sign up for making tax digital for income tax if the taxable turnover of a self-employed business or property income is more than £10,000.

Every individual should have the following information to follow the procedures of Making tax digital for income tax. The details required are the business name, email address, National insurance number, accounting period, and the type of accounting procedure (Cash accounting or Standard accounting) followed.

It is also compulsory to have the government gateway ID and password used when filing the self-assessment tax return before signing up for making tax digital for income tax.

After signing up

After signing up successfully for the making tax digital for income tax, the organisation must send the summary of the business expenses and income once every three months.

At the end of each accounting period, the business incomes and expenses are finalised. The individual should also report their income and the claims received throughout the period to HMRC. The accuracy of the given information is assured after the final declaration has been made.

The income tax will be calculated based on the provided information, and the payment needs to be made to HMRC by the 31st of January in the following year.

Suppose an agent signs up the client for Making Tax Digital. It is vital to check whether the client has already submitted the self-assessment return for the tax year, and the agent also needs to check whether the client is registered for self-assessment.

If the client has already been registered for self-assessment, the agent should take the necessary steps to obtain the client’s authorisation. After the authorisation process has been completed, the agent will undertake the tasks mentioned above.

Making Tax Digital – Corporation Tax

Making tax digital for corporation tax has not yet come into force in the United Kingdom.

The HMRC has been obtaining the opinions of the public from the 12th of November 2020 to the 5th of March 2021. The relevant authorities are currently analysing these opinions.

Making Tax Digital is a broad concept to be understood by many business owners and contractors. If you require additional assistance in understanding how Making Tax Digital will affect your business, you could contact us via telephone on 0203 0111 898 or speak to us via our online chat option.

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