The UK tax system is facing one of its biggest changes with the introduction of this massive gamechanger. The new legislation requires that VAT-registered businesses store their records digitally and automatically submit their VAT returns to HMRC through accounting software compatible with MTD. For contractors, learning to navigate this initiative and ensuring they’re prepared for it is crucial, especially because non-compliance can carry heavy penalties.
First announced in the 2015 Spring Budget, MTD is designed to transform the UK tax system for individuals and businesses. The legislation introduces digital record-keeping in order to make the tax system more efficient, effective and easier for both taxpayers and the government.
You will need to start reporting your taxes on a quarterly basis as of now and will also need to record this and every other transaction digitally on MTD-compliant accounting software, such as FreeAgent.
If your business has a taxable turnover above the VAT threshold, currently set at £85,000, you will need to comply with Making Tax Digital. While you don’t need to opt-in if your VAT-registered business is below this threshold, HMRC encourages you to do so anyway.
The government hopes to improve the UK tax experience by introducing MTD, but this is not all; HMRC also intends to collect £4.8 billion by 2023 through this new process. With an estimated £9.4 billion in tax revenue missing due to errors or incorrect submissions, the government aims to reduce this by receiving quarterly tax reports and ensuring the storage of crucial document and records in digital form.
With the introduction of MTD, you have to keep certain information as digital records. You will have to record and store each individual transaction digitally, especially as HMRC requires records to be as current as possible.
You will also have to keep certain information as digital records, including your business name, place of business, VAT registration number and rate of VAT charged. The accounting software you use has to be able to display the audit trail between records and VAT returns as well. In addition, you have to keep details on supplies you made and received, as well as their time and value. Your records will need to be stored digitally for six years.
From April 2020, it will be mandatory to use software to submit income and corporation tax, not just VAT.
As contractor accountants, we understand that Making Tax Digital feels like a big change; however, we also know there are several benefits to the introduction of this legislation.
If you do not comply with Making Tax Digital, you’ll incur a default surcharge that will be in place until April 2021; after this period, the surcharge will be replaced by points-based late-submission penalties and late payment penalties. The surcharge owed is calculated as a percentage of the VAT that’s unpaid by the due date. The percentage for the first late payment during this period will be 2% of the outstanding VAT; this fee will progressively increase to 5%, 10% and 15% for further payments.
Once the points-based system replaces the default surcharge, HMRC will award a point for every missed payment, no matter what it is (from VAT to corporation tax). Points expire after a determined period of compliance. You pay penalties when you reach a point threshold: two for annual submissions, four for quarterly and five for monthly.
The accounting software you choose to keep your digital records need to be compliant with Making Tax Digital. FreeAgent bookkeeping software, which we offer to our clients when you work with us, is a good example of that. This cloud-based system can be accessed anywhere, from your browser to your smartphone, and will always keep your information secure. All of your financial data is safely transferred to FreeAgent’s backup servers several times an hour.
You won’t have to worry about when to submit your digital VAT returns, as FreeAgent has been helping contractors do this for the last eight years. With this software, you can track your expenses and income easily and quickly without any hassle.
Ensuring your compliance with Making Tax Digital is vital and peace of mind is priceless. Our expert Gorilla Accounting team will handle MTD for you, so you won’t have to stress about non-compliance, freeing you up to focus on what really matters: your business. We have many years of financial experience and vast knowledge of UK legislation, which we put to good use for all of our customers.
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