Making Tax Digital

HMRC has set out ambitious plans for making tax filing easier and modernized with digitization.  Many businesses have adopted the use of accounting and enterprise resource management softwares as part of their modernization. The use of softwares for accounting and other business resources management is becoming much of a necessity to stay competitive than a choice. HMRC has taken a proactive approach in what is dubbed as a twenty-first- century style of tax filing through digital means.

Making Tax Digital – What Is The MTD Program?

MTD or making tax digital is an initiative undertaken by the HMRC to make the tax filing through online means. The aim is to make the tax filing for VAT and income taxes more convenient, easier, and eliminate errors and fraud with tax filing. The gradual application of MTD has been proposed with the phase-wise implementation of digitizing the whole tax filing system.

When Does The MTD Program Start?

The voluntary inclusion of business in the MTD program has already been underway. The VAT registered businesses with HMRC can already apply for MTD readiness and file their VAT returns digitally. VAT registered business with a taxable turnover above the threshold of £ 85,000 are required to file the VAT filing through digital means. Small businesses with turnover below £ 85,000 have time to prepare till April 2022. The digital income tax filing dates are gradual starting with the tax year in April 2021.

Digital Record-Keeping Requirements:

That’s the crux of the discussion, which records you need to keep in digital formats to comply with the MTD. Literally, all business activities incur some sort of costs or generate income, which implies all business records to be digitized. However, for the time being, the MTD requirements mainly concern the income tax and VAT filing records. You can choose the software best matching your requirements and budget, the general requirements from HMRC revolve around VAT and income tax validity.

  • Prepare digital records of designatory data of the business including business name and VAT registration, Income Tax number, Business category, etc.
  • Digital records for supplies, purchases, and third-party supplies. All payments and receipts affecting the business income and receipts of the business.
  • Digital records of invoice keeping aren’t mandatory at the moment, but the records need to back the data provided in the digital accounting record of tax calculations
  • All accounting entries relating to business income and expenses such as petty cash entries, charitable donations, etc.
  • Digital records for the business tax obligation on sales, acquisitions, or on behalf of suppliers.
  • Income tax and VAT adjustments are required, for example, any transactions that couldn’t be recorded digitally and require VAT reclaims.

Does MTD Compliance Require Particular Software?

It doesn’t at the moment. HMRC has not announced any specific software use for digitizing the tax filing system yet. Most businesses incorporate ERM software that includes accounting software packages. You can continue to use the spreadsheets, existing software, or compliance through third-party accounting software. For small businesses and self-employed, the requirement is to use the software or accounting apps to maintain the digital records of the business.


Accounting and Bookkeeping Changes:

All types and sizes of businesses require bookkeeping and accounting records anyway. They can still maintain the accounting records the same way, but need to file the records with HMRC digitally. Depending on your business size and complexities of business operations you may use designated software or spreadsheets to maintain digital records.

  • Prepare all sales and receipts records through spreadsheets or link to the software
  • All accounting entries can be maintained digitally and linked to the HMRC tax filing system
  • You can apply for any accounting, VAT, or income tax adjustments at the tax year ending as you normally do without the software

Exemptions with the MTD Program:

The only exemptions with the MTD compliance program at the moment are location and disability-based. The location exemptions apply if you do not have access to stable internet or digital record-keeping cannot be maintained with your business. The disability exemptions are due to physical disability or lack of knowledge with software implementation. In case of applying an exemption with unfamiliarity, the HMRC would set up a date of transition for your business to comply with MTD program in the future.

Important Considerations with MTD (Making Tax Digital):

The HMRC announced the making the tax digital program for VAT filing initially. The pilot program for income tax filing is also underway. For large businesses with a VAT registered name the threshold of £ 85,000 was set out initially. All businesses below that limit will eventually be required to file for VAT taxes digitally. Your business can still use the existing recordkeeping methods of paper books or spreadsheets; however, it will require tax filing through digital means only. The paper-based accounting records would eventually become obsolete. Small businesses may continue to use spreadsheets and use “bridging or third-party” software to comply with the MTD program compliance.  For more information about making tax digital please see and the Government review and publication. Then go-ahead and check out all Spartan Accounting small business accounting services and see how our small business accounting can help make your business more tax efficient!

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