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6 things you need to know about Making Tax Digital

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by Startacus Admin

Making Tax Digital

A couple of months ago, the UK government launched a new consultation into Making Tax Digital, its ambitious plan to implement a fully digital tax system across the whole of the UK by 2020.

With consultation documents published and people invited to comment on the proposals, what are the main things that small business owners need to be aware of? 

Emily Coltman FCA, chief accountant to FreeAgent - who provide multi-award winning cloud accounting software for freelancers, micro-businesses and their accountants - looks at six key things business owners should know about the Making Tax Digital proposals. 

1 - What is Making Tax Digital?

The UK government is aiming to “transform HM Revenue and Customs (HMRC) into one of the most digitally-advanced tax administrations in the world”. First announced in 2015 by then-Chancellor George Osborne, the plans seek to move the UK to a fully-digital tax system with the aim of making tax more effective, more efficient, more transparent and easier for taxpayers to deal with.

Although the government has highlighted a 2020 target for making the UK tax system fully digital, many businesses will have to start complying with Making Tax Digital from April 2018.

2 - Who will be affected?

At this stage, the Making Tax Digital proposals only apply to sole traders and partnerships - the consultation doesn’t address limited companies or their directors, which will be covered in a separate consultation later this year.

HMRC is also proposing that Making Tax Digital (MTD) would only apply after £10,000 annual income or turnover, so a sole trader with one small business that makes sales under £10,000 a year would be exempt from MTD. However, a sole trader with two businesses, each making sales of £6,000 a year, would have to comply with MTD, because his/her total income for the year is £12,000.

HMRC will also exempt businesses who genuinely cannot go digital, for example due to religious reasons, disability, age, remoteness of location or because they have no access to 2Mbps broadband or faster.

Making Tax Digital

3 - What will businesses have to do?

Contrary to popular belief, Making Tax Digital would not require businesses to file four complete tax returns every year. Instead, the process is designed to replace the current tax return system and get businesses to update HMRC about their tax liabilities throughout the year. 

Under the plans, businesses would send summary data to HMRC about their business each quarter (or more often if they prefer). This data would consist of total income and total expenditure, with the expenditure broken down into categories such as travel and advertising. However, they would still have to provide HMRC with a final annual report - and the time that businesses have to send this final report would decrease from 10 months to nine months.

In addition:

  • Businesses wouldn’t have to keep any additional paper records.
  • If the business is registered for VAT, one report would cover both income tax and VAT reporting requirements.
  • If the business needs to make accounting adjustments, such as revaluations of closing stock (which would apply mainly to businesses who are not using the cash basis of accounting) then they could do this either mid-year or at the end of the year.
  • Allowances and reliefs, such as Annual Investment Allowance, could also be notified to HMRC either in-year or at the end of the year. For example if an asset has been bought, the suggestion is that HMRC could be told at the time the asset is bought that it’s going to be eligible for Annual Investment Allowance.
  • HMRC believe that the cash basis of accounting should be extended to larger businesses, as this will be simpler for them to use. It has suggested doubling the current entry threshold, which matches the VAT registration threshold - so a business would be able to begin using the cash basis of accounting if it has sales up to £166,000, using today’s VAT registration threshold.

4 - What will happen to tax payments? 

HMRC is not planning to change the current payment dates, but they have asked as part of the consultation if they should review the payment on account regime - which can be complicated and severely compromise a small business’s cash flow in its early stages.

Under MTD, businesses may have the right to make “voluntary payments” towards their tax liabilities throughout the year, which would be aggregated together. HMRC has tentatively suggested it may need to be warned of upcoming voluntary payments.

Making Tax Digital

5 - How will penalties work?

HMRC is proposing to abolish the current penalty system for late submissions and instead impose a “points” system similar to driving licence penalty points, with a financial penalty to be imposed only when the points reach a set level. That level is suggested as four points, with the slate cleaned after 24 months after the last points were added. 

Penalties for inaccurate information would only apply to the End of Year update and VAT quarterly returns. In the first year of MTD there would also be a “soft landing” for the penalty regime, so penalties will not be in full effect.

6 - How will I provide HMRC with information?

HMRC has confirmed that they will not be providing their own free bookkeeping/accounting software and that the use of “digital record keeping software that links to and updates business’s digital accounts with HMRC” will be mandatory, except for taxpayers who are exempt from MTD.

That means businesses would need to send information to HMRC through external digital tools - for example through cloud accounting software like FreeAgent or through other systems highlighted by HMRC.

Emily Coltman FCA is chief accountant at FreeAgent, who provide multi-award winning cloud accounting software for freelancers, micro-businesses and their accountants. Try it for free at


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Published on: 26th October 2016

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