What does Making Tax Digital Mean for Small Business Owners?

What is Making Tax Digital for VAT?

On 13 September 2017, HMRC announced that the Making Tax Digital (MTD) reform for businesses above the registration threshold and earlier this year they announced that it will be mandatory for all VAT registered businesses with effect from 1 November 2022. The new rules will apply to small businesses – those with a taxable turnover of £85,000 or less in a year. Businesses will be required to digitise their VAT returns and keep digital records of all business transactions. This article provides an overview of what the MTD reform means for small businesses and how they can prepare for it.

The MTD reform is part of HMRC`s plans to make the tax system simpler, more efficient and easier to comply with. The ultimate goal is to reduce the number of errors and fraud in the system and to make it easier for businesses to get their taxes right. 

Is Making Tax Digital Compulsory?

Under the new rules, businesses will be required to use compatible software to keep digital records of their business transactions and to file their VAT returns. The software must be able to connect to HMRC`s systems and meet certain other requirements. 

Businesses will need to switch to MTD compliant software for any submissions to be made from 01 November 2020. HMRC’s standard facility to submit returns will be unavailable for the periods ending on or before 31 October 2021.

HMRC has said that it will provide support to businesses to help them transition to the new system. This includes making available a range of free and paid-for accounting software, as well as providing training and guidance. 

Is Your Accounting Software Ready for Making Tax Digital?

There are a number of things that small businesses can do now to prepare for the MTD reform.

1. Firstly, they should check whether accounting software is compatible with the new requirements. If it is not, they will need to upgrade to a compatible version or switch to a different software package.
2. Secondly, businesses should start keeping digital records of their business transactions. This can be done using accounting software, spreadsheet software such as Microsoft Excel, or Google Sheets. 
3. Finally, businesses should familiarise themselves with the new requirements and make sure they understand how the changes will affect them. HMRC`s website provides guidance on the MTD reform and what businesses need to do to prepare for it.

Conclusion

The Making Tax Digital reform will bring about significant changes to the way small businesses file their VAT returns. However, with some preparation, businesses can make the transition to the new system with relative ease. By taking action now, businesses can ensure they are ready for the changes when they come into effect from 01 November 2022. 

If you have any questions about the MTD reform or how it will affect your business, please get in touch. We`d be happy to help.