With the evolving tax regulations and compliance requirements, governments worldwide are embracing digital technologies to streamline and digitize tax systems. One such initiative that has gained significant attention is Making Tax Digital (MTD).
MTD is a comprehensive digital tax transformation program. It aims to simplify tax administration, enhance accuracy, and provide real-time visibility into tax obligations. In this article guide, we will explain the concept of MTD and provide you with a clear understanding of its implications, benefits, and compliance requirements.
Table of Contents
MTD: Introduction
Making Tax Digital was launched on April 1, 2019. Since April 2022, all VAT-registered businesses, including those below the (Value Added Tax) VAT threshold, have had to follow MTD rules. It affects around 1.1 million firms with taxable revenue below the VAT threshold. Beginning in April 2024, MTD will be expanded to include Income Tax for self-employed enterprises and landlords above the threshold.
Implementing technology and automation tools will add value to the business. Approximately a fifth of businesses in this category have voluntarily registered for MTD, leaving approximately 750,000 businesses to comply with the new regulation.
Making Tax Digital: Objectives
Making Tax Digital (MTD) aims to transform the UK tax system by making it much easier, more efficient and effective for taxpayers to report and pay the right amount of tax. The initiative aims to reduce the tax gap, improve transparency, and provide real-time reporting.
The changes are expected to apply to several taxpayers, including businesses, entrepreneurs, landlords, and individual taxpayers. The first mandatory use of digital methods was for Value Added Tax, beginning in April 2019 for many businesses and organisations.
Making Tax Digital Timeline
As you have seen, MTD applies for all VAT-registered businesses with a turnover above £85,000 since April 2019. From April 2022, all VAT-registered businesses, irrespective of their turnover, should use MTD. All businesses should use MTD from April 2023. It includes non-VAT registered traders and landlords who earn more than £10,000 (gross).
In simpler terms, if your tax cycle doesn’t begin on April 1, you must switch to digital recordkeeping and online VAT return submission from the start of your next VAT period.
Who Should Use MTD?
Currently, VAT-registered businesses with a taxable turnover above £85,000 the VAT threshold should use MTD.
You don’t have to use MTD if your company is registered for VAT but has a taxable turnover of less than the VAT threshold, less than £85,000. In 2026, the VAT threshold is expected to be £50,000. In 2027, this amount is expected to decrease further to £30,000.
How Does MTD Impact Businesses?
Now, you must know that all businesses should start using MTD. At this time, you should know the impact of MTD on businesses. Let’s briefly discuss it.
- Maintaining Digital Records
To comply with MTD, taxpayers must have digital revenue and expense records. They should maintain their records in digital formats like accounting software or spreadsheets.
- Using the Right Software
To meet the act’s requirements, businesses must use software that complies with MTD’s policies. Several MTD-compatible software toolkits are available on the market, each with specific beneficial features and functions.
- Submitting Quarterly Updates
Under MTD, businesses are required to provide HMRC with quarterly updates regarding their income and expenses. These updates offer up-to-date financial information, enabling companies to manage their tax obligations better.
- Saves Time and Money
When you use MTD-compatible software, you are free from manually filing tax returns or entering the data. It helps businesses to enhance their tax procedures, automate calculations, and create more accurate reports.
- Eliminates Errors
Using MTD-compatible software, businesses can decrease the risk of errors in their tax returns. This software spots errors and assures accurate submissions. With this feature, businesses can avoid penalties.
Tips for Businesses to Adapt to MTD
Here are a few tips for businesses to successfully adapt to MTD.
- Stay Updated With MTD Rules:
Becoming familiar with the government’s MTD guidance is essential to ensure you follow the laws and meet the requirements. Understanding the new guidelines is crucial as it will help you adjust your recordkeeping practices to fulfil your MTD obligations.
- Choose and Use the Right MTD-Compatible Software:
Businesses should choose the best software that complies with MTD and use them effectively. When choosing software, remember the size of your business and the complexity of your accounting process.
Conclusion
In conclusion, whether you are a business owner or an individual taxpayer, you should understand the rules about Making Tax Digital. After you gain deep knowledge about MTD, explore the tools necessary to navigate the world of MTD and focus on successfully converting to a digital tax environment. Adopting MTD-compatible software allows you to streamline your tax processes, stay compliant with regulations, and improve your financial management.
