In recent years, the UK government has implemented a new system for tax reporting called "Making Tax Digital" (MTD). This system aims to modernise and simplify the tax reporting process for businesses and individuals, making it easier to keep track of tax obligations and reduce errors.
What is Making Tax Digital?
Making Tax Digital (MTD) is a UK government initiative to digitise the tax system. The goal is to make it easier and more efficient for individuals and businesses to submit tax information to HM Revenue and Customs (HMRC). MTD applies to a range of taxes, including VAT, income tax, and corporation tax.
Under MTD, businesses and individuals are required to keep digital records of their income and expenses, and submit these records to HMRC using compatible software. This means that paper-based records and manual data entry are no longer acceptable.
Why was Making Tax Digital introduced?
Making Tax Digital was introduced to help reduce errors and improve efficiency in the tax system. HMRC estimates that the UK tax gap (the difference between the amount of tax owed and the amount actually collected) is around £31 billion per year. A significant proportion of this is due to errors in tax reporting, either intentional or accidental.
MTD aims to address this issue by making it easier for individuals and businesses to keep accurate records and submit tax information to HMRC. The system is also intended to reduce the administrative burden of tax reporting, freeing up time and resources for businesses to focus on other aspects of their operations.
Who is affected by Making Tax Digital?
MTD affects most businesses and individuals who are required to submit tax information to HMRC. The specific requirements depend on the type and size of the business, as well as the type of tax being reported.
For VAT reporting, businesses with a turnover above the VAT registration threshold (currently £85,000) are required to keep digital records and submit VAT returns using MTD-compatible software.
For income tax reporting, businesses and self-employed individuals with income above a certain threshold (currently £10,000) are required to keep digital records and submit income tax updates to HMRC at least once per quarter.
For corporation tax reporting, companies are required to keep digital records and submit their tax returns using MTD-compatible software.
How can businesses and individuals prepare for Making Tax Digital?
To comply with Making Tax Digital, businesses and individuals will need to use compatible software to keep digital records and submit tax information to HMRC. There are many software providers available, ranging from basic free options to more advanced paid solutions.
It is important to choose software that is compatible with MTD, as non-compliance can result in penalties and fines. HMRC provides a list of software providers on their website, which can be used to find a suitable solution.
In addition to choosing compatible software, businesses and individuals will need to ensure that their record-keeping processes are up to date and accurate. This may involve making changes to existing systems or implementing new processes to ensure that all income and expenses are recorded digitally.
Making Tax Digital is a significant change to the UK tax system, but it is designed to make tax reporting simpler and more efficient for businesses and individuals.