This is a major shakeup, and it'll affect every corner of the tax system over the next few years. In this article, we'll quickly summarise what MTD is and explain how your business can benefit from the new system.
What is Making Tax Digital?
Making Tax Digital aims to do exactly what it says on the tin: to make all tax returns fully digital. This means returns must be kept and submitted in digital form, rather than entered manually. Under MTD, eligible businesses must:
- Keep records in digital form
- Keep records in HMRC-approved software
- Send quarterly VAT returns to HMRC
Businesses with an annual turnover above £85,000 have been under the new rules since April 2019. They will extend to all businesses registered for VAT, regardless of turnover, from April 2022. After that, MTD extends to income tax self-assessment and, eventually, the whole tax system.
These are the basics, but MTD has some more specific requirements. To learn more, consult a guide to Making Tax Digital [1].
Why Making Tax Digital is a Good Thing
The new rules can be complicated and there's a lot to keep in mind. With that said, though, they can also provide significant benefits, helping to streamline your business and reduce errors and waste.
Less paperwork
The shift to digital tax means you don't need to worry about getting all your documents together when it comes time to pay VAT. Under the present system, you need to sort through invoices, receipts and other documents, sometimes going back to the very start of the tax year.
Under MTD, though, you can track all your relevant data online in your accounting software, where it's automatically loaded in and submitted to HMRC. Quarterly returns also help with this, as they can help flag problems earlier, meaning you don't need to wait until the end of the tax year to resolve them.
Fewer mistakes
In addition to being massively time-consuming, having to trawl through your physical records can severely increase the chance of human error. You can misplace records, miscount them or otherwise miscalculate. On top of this, entering your data manually also increases the chance of simply typing in the wrong figure. These sorts of mistakes can be costly, and the disruption they cause can severely undermine your business's ability to grow into the future [1]
Under MTD, you don't need to worry about any of this.
That's because the system requires all data be digitally linked - what gets submitted to HMRC is the same as what was initially recorded in your accounting software. This process is automated, so there's far less chance of data being entered wrong. By keeping you aware of important dates and sending notifications when deadlines draw near, MTD can even make sure that you always have the funds you need to pay your tax bill.
Real-time tax information
Similarly, MTD means you don't have to wait until you submit your tax return to view your information. Under the new system, your information will be processed all year round. This means you'll be able to check how much you owe in real time, which will allow you to get your finances in order well before the tax deadline.
Better data, better planning
The need to find functional compatible software [2] for MTD is one of the more fiddly parts of the scheme. Happily, though, using the right software can provide significant benefits to your business. This is because good MTD software isn't just for Making Tax Digital. Instead, most providers sell fully integrated accounting software.
This means that you get additional benefits on top of the ones listed above. You'll have all your incoming and outgoing data in one place, for instance, and the software will allow you to cut that data to reveal patterns and trends.
You can produce detailed reports, analyse key performance indicators and more. Having this data will allow you to better plan ahead, which will help your business grow and develop.
Making Tax Digital promises to severely shake up how businesses do VAT - but it also presents significant opportunities, allowing you to streamline your processes, cut out excess paperwork and take advantage of innovative accounting software features.
The April 2022 deadline is approaching soon, though. To make sure you can benefit from MTD, get ready to make the shift as soon as possible.