Making Tax Digital Survival Guide

This is a freeview factsheet for the many self-employed taxpayers, company owners and property landlords who are unaware of HM Revenue and Custom’s radical plans to transform the tax online filing system. 

The facts

The way that some self-employed taxpayers report their business profits to HMRC is set to change in April 2023 under the Making Tax Digital (MTD) for business regime.

VAT registered business

• VAT registered business, have been within MTD for VAT, since April 2019. They file VAT returns directly from their bookkeeping software or spreadsheet.
• MTD is mandatory if your taxable supplies exceed the VAT registration threshold.
• You must retain digital records and submit their VAT returns to HMRC using ‘functional compatible software’.
  • More complex businesses (PLCs, VAT groups and those on Annual Accounting etc, see deferred businesses) joined the new system on 1 October 2019.
  • Do you need to be in Making VAT Digital (MVD)? See our MVD tool: Who has to join?

Self Assessment

• Under MTD it is proposed that the Self Assessment tax return will be replaced by five new reporting obligations made during and after the tax year.
• This measure is due to commence on 6 April 2023 for self-employed businesses and landlords with business turnover above £10,000.
• Your first tax return under such a system is due in the fourth month of your accounting period, you will then have to file with HMRC every three months. For example, if you have a 31 March or 5 April year end, your first return will be due on 31 July 2023 or 5  August 2023 (full details of deadlines to be confirmed by HMRC).
• If you are not already using software for your record-keeping/accounting, you will need to learn how to use a spreadsheet or some type of accounting software or App.
• You will need a reliable internet connection and a facility to store your electronic data.

What equipment (hardware) and software or Apps will I need?

• Your requirements depend on you, how you feel about technology and the nature of your business.
• Every business is different.
• If you use an accountant you can continue to do so.
• You can delegate all your bookkeeping and online filing to an accountant, tax adviser or bookkeeper if you feel you cannot cope with this new system.
• If you are one of the two million taxpayers who do not engage any professional help in reporting to HMRC you need to decide which system to use.
• Accounting using a phone is not for everyone, choose what may be best for you from the table below. 

Equipment/system:	Phone or tablet apps	Computer/tablet & spreadsheet	Computer/tablet &accounting software
About you/your business. Not all will apply. chose the ones which may apply to you.	You own a smartphone or a tablet.You always have good internet access or a phone signal.You are happy to enter data onto your phone or tablet.You rarely need to issue paper invoices: your customers don’t want or expect receipts.Your expenses are pretty simple and you don’t expect to have many queriesYou don’t give customers credit.You do not have many transactions in a tax year.You mainly receive your income in cash and payout your expenses in cash.You keep a separate business bank account.You like to do your bookkeeping every day.	You have access to a computer.You have internet access. Internet and phone signals may be restricted.You would rather use a big screen/don’t like/don’t use a phone for data entry.You are familiar with spreadsheets/you are not good with software/technology.You need a simple system to replace your manual bookkeeping system.You pay for goods using cash or bank card or credit card.Your income comes in by cash, cheque or online banking.You do quotes for customers or your customers like receiving invoices.You allow basic credit to customers.You have a business bank account or you use one bank account for business and private transactions.	You have a computer.You would rather use a big screen/don’t like to use a phone for data entry.You are OK with software.You are willing to learn new systems.You pay for goods using cash or bank card or credit card.Your income comes in by cash, cheque or online.You do quotes for customers or your customers like receiving invoices.You need credit control.You have a business bank account or you use one bank account for business and private transactions.
Present bookkeeping method(s) may include:	You keep receipts for payments, total up mileage per MOT certificate, maybe use a diary and total up everything at the end of the tax year using bank statements.You keep a paper cash book.You enter details on tax return once a year.	You maintain a receipt book or keep a pile of issued invoices to record sales.You keep receipts in a box and enter them in batches during or at the end of the tax year.You manually check over your bank statements to check you have captured all the relevant income and expenses.You keep a paper cash book or use a spreadsheet to summarise your income and expenses.You enter details on tax return once a year.	You do all your bookkeeping using your software.You generate an invoice for your sales from your software and you like to keep receipts on paper and then enter them in batches into the software.You might sometimes use a spreadsheet for summaries.You enter details on tax return once a year.
Changes with Making Tax Digital	You have real-time recording of income/sales.You record all your income and expense on your phone and store the data in the cloud.Your App sends your bank receipts and payments to your summary for HMRC. You have to check each transaction to set up the system, you will need to manually enter your cash sales and purchases.Your App sends your figures to HMRC every quarter, You still have to make the usual accounting adjustments at the year-end in the final year-end report.It is best to avoid using a personal bank account for business. This will make your bank feed more complicated.	You use a spreadsheet instead of a paper book to:List your sales/invoicesList and analyse your expenses.Your spreadsheet will now have to link to HMRC to allow quarterly reporting. Software will become available to do this as the software market grows.Depending on the results of its test pilots, HMRC may allow you to manually enter your quarterly figures.You still have to make the usual accounting adjustments at the year-end.	Your software will need to be updated to allow MTD filings.If your software does not have a bank feed then you can update to add that.You still have to make the usual accounting adjustments at the year-end.It is best to avoid using a personal bank account for business. This will make an automatic bank feed more complicated.
Verdict	Good for very small technically minded businesses with reliable internet who like entering data on phones/tablets daily.	Good for any size of business if you prefer a simple system where you can see all your transactions on a big screen and you don’t have to do bookkeeping daily.	Good for any size of business if you prefer a system where you can see all your transactions on a big screen and you don’t have to do bookkeeping daily, provided that you are happy to learn new software.

Digital exclusion opt-out

• If you are reading this guide you are probably online and this might not apply.
• You will be excluded from the electronic bookkeeping and filing elements of MTD if you are unable to handle it due to age, disability or location or if it is contrary to your religion. You will need to satisfy HMRC that you cannot do so before they will agree to the exemption.

MTD for VAT

If you are a VAT registered business with taxable supplies (non-exempt turnover), which exceeds the VAT registration threshold you would have been mandated into MTD for VAT from 1 April 2019.

The start date was 1 October 2019 if you are a complex business (annual VAT accounting, a PLC, a trust, a VAT group, a local authority, non-resident etc), see MVD: When do I have to join?

You will have to keep digital records and file returns under MTD for the first VAT return commencing after 1 April 2019/1 Oct 2019.

If you are not VAT registered but your taxable supplies exceed the VAT registration threshold on or after 1 April 2019, you will be mandated into MTD for VAT from your VAT registration date.

If you are VAT registered but your taxable supplies do not exceed the VAT registration threshold at 1 April 2019, you are exempt from MTD for VAT until the first day of the month following the end of the first 12-month period ending after 1 April 2019 where your taxable supplies do exceed the threshold. For example, if the first time you cross the VAT threshold is the 12 months ending 30 November 2019, you are mandated into MTD for VAT from 1 December 2019, even if you have been VAT registered for many years.

From April 2022 all VAT registered unincorporated businesses will report VAT via MTD returns, regardless of turnover levels.

Once in MTD for VAT, you remain in MTD for VAT unless you deregister for VAT.

Under MTD for VAT, you complete the same number of VAT returns as currently (four for quarterly, 12 for monthly, one for Annual Accounting). The due dates remain the same.

The MVD pilot opened for some businesses on 16 October 2018. See MVD when to join the pilot.

Income Tax

Five tax returns per year

The first tax year likely to be affected is 2023-24. This runs from 6 April 2023 to 5 April 2024. 

Assuming you choose an accounting period that is co-terminus with the tax year your:

1. The first report will be due in June/July 2023.
2. The second report will be due in Sept/Oct 2023.
3. The third report will be due in Dec 2023/Jan 2024.
4. Your Self Assessment tax return for 2022-23 will also be due by 31 January 2024.
5. The fourth report will be due in March/April 2024.
6. Fifth and final year-end report deadline, probably January 2025 in the first year.

You will be able to Change your accounting period and quarters. The end-of-year report then becomes due at the earlier of 10 months following the year-end and 31 January. 

Tax payments

• You will be allowed to voluntarily pay your taxes as you go: the detail is still being decided.
• Eventually, it is possible that you will be required to make four payments per year on account of tax.

Penalties

• There will be no late filing penalties for at least a year while the new system beds in. After that, you will suffer penalties if you file your returns late.
• Penalties already apply for errors in returns or documents.
• Late payment interest already applies.
• See Penalties: Making Tax Digital

Useful guides on this topic

Making VAT Digital: When do I have to join?
This Virtual Tax Partner © ‘VtaxP’ © tool checks Making tax digital for VAT. Will it apply to me? Am I exempted? Am I deferred. Do I need new software to file VAT returns online?

Making Tax Digital Index
Who has to file when and where, ideas to simplify and latest documents.

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