Who is affected by the basis period reform? How does the new system work? And what do you need to do to differently? We explain all

Over the last few years, HMRC has introduced some changes to the tax system that might have changed the way you file your taxes if your accounting period is different from the standard tax year of 6 April to 5 April.

If you’re self-employed, a partner in a trading partnership, an unincorporated entity with trading income – such as a trading trust or estate, or a non-resident company with trading income charged to Income Tax – you need to make sure your business practices are in line with the basis period reform as the transitional period begins this year (2023).

The new measures intend to reform the basis period and create a simpler, fairer and more transparent set of rules for taxpayers. While related to Making Tax Digital (MTD) for Income Tax, which will arrive in April 2026, the basis period reform is an independent initiative.

If you’re affected by the basis period reform, read on to find out more about the initiative and what the changes mean for your business.

What is the basis period?

The basis period is the period that you’re liable to pay tax on based on your profit and loss.

This can be different from your accounting period, which is the 12-month time frame you use for your financial reporting, the final day of which is your accounting date (and the day you work out all your taxes).

Most businesses default to the tax year to decide their accounting date, which runs from 6 April to 5 April the following year. This would make your accounting date 5 April. If you use the tax year as your accounting period, your basis period and your accounting period match.

For example, if you started a business on 5 January 2022, you must calculate your taxes in 2023, you’ll work out your income and expenditure for the months from January 2022 up to 5 April 2022.

In subsequent years, your taxes will always be based on your accounts in the 12-month period between 6 April and 5 April, which matches the tax year.

However, it’s not always preferable or practical for all businesses to use the tax year basis period.

What is a non-tax year basis period and why would you choose it?

For some businesses, a non-tax year basis period is more suitable. For example, if you work in industries such as farming or tourism, which are seasonal, you won’t earn profits consistently throughout the year. This means it’s not advantageous for you to pay tax on all your profits for the same 12-month accounting period every year.

Likewise, if you work with international businesses that don’t observe the UK tax year, you may prefer to have tax and accounting dates that more closely align with your trading schedule.

However, previous rules meant that businesses using non-tax year basis periods were taxed twice on their profits in their early trading years.

For example, if you decided to choose 4 January 2022 as your accounting date because that’s when you started trading, HMRC would treat the first few months leading up to 5 April as a shorter than usual basis period. That meant you’d have to calculate and pay taxes for the first few months your business was in operation.

Simple enough, right? Well, no, because HMRC still classified the period 5 January 2022 to 4 January 2023 as a full basis period, even though it includes the initial shorter than usual January to April 2022 basis period for which you’ve already paid tax.

Unfortunately, that tax wasn’t waived. Instead, you had to pay tax on that period again, known as overlap profit. You could offset this against your tax bill, but only once your business had ceased trading. That means, if you run your business successfully for 40 years before closing it down, you wouldn’t recoup your overlap profits until 2062. It’s no wonder many forget.

How does the basis period reform work?

If you think those basis period rules sound unfair, there’s good news: HMRC recently got rid of all existing requirements and introduced a system that it hopes will result in fairer outcomes between businesses and a clearer relationship between profits and tax in any given year.

As of the tax year 2024/25, it will be a legal requirement for all unincorporated businesses to use 6 April to 5 April as their basis period, regardless of what their accounting period is.

However, 2023/24 is considered a transitional period, during which the basis period will be longer than 12 months if your accounting period doesn’t match the tax year. For example, if your accounting date is 4 January, the basis period for which you’ll have to calculate taxes will run from 4 January 2023 to 5 April 2024.

You might be landed with a larger than usual tax bill, but, unlike under the previous system, you’ll be able to deduct these overlap profits from the plus-size tax bill and then pay it off interest-free over the next five years. You will need to prove this with documentation to claim it back.

When 2024/25 comes around, you can then decide whether to simplify things by switching your accounting period to match the tax year.

As discussed before, if your business is seasonal, you may wish to continue with unusual accounting dates, now safe in the knowledge you can recoup your overlap profits straight away, rather than having to wait until you close your business.

What does basis period reform mean for Making Tax Digital?

The basis period reforms are an attempt to simplify reporting requirements ahead of the introduction of MTD for Income Tax in 2026.

As MTD requires at least quarterly reports, as well as an end-of-period statement and a single final declaration, sole traders with multiple businesses that use a non-tax year basis period could find themselves with a bewildering number of reports due at various times throughout the year. This confusion could result in missed deadlines and penalties.

However, following the basis period reform, if you own multiple businesses, regardless of your accounting dates for each of those businesses, the reporting deadlines will be the same, which will be easier to manage.

Accounting software can make it even easier to meet your MTD requirements and remain compliant. For example, you can use accounting software to automate the creation of periodic reports rather than having to always remember to produce them manually. You can also monitor cash flow from your dashboard and even track taxes.

How can I make sure my business practices are in line with the basis period reform?

If you already use the tax year as your basis period, then there’s no need to take any action.

However, if you are one of the estimated 528,000 sole traders and partners with a non-tax year basis period, you have some choices to make. 2024/25 might sound like a long way off, but the transitional period of 2023/24 is here already.

To prepare, remember the following key points:

• From 2024/25, you’re legally obliged to calculate your taxes based on the tax year, not your accounting period
• You could be landed with a larger transitional tax bill in 2023/24, which you can pay back over five years interest-free. Make sure to prepare for any impact this could have on your cash flow
• You can choose to change your accounting period to match the tax year, which could simplify your accounting, but there’s no obligation to do so

You can also find plenty of advice in Sage’s Making Tax Digital hub.

This article was written as part of a paid-for content campaign with Sage

The post Basis Period Reform and Making Tax Digital: Everything you need to know  appeared first on Small Business UK.

A year after the final mandate for Making Tax Digital for VAT coming into force – with all VAT-registered businesses bound to comply – what do we know and what have we learned?

Small Business sat down with Fabiano Rocha, lead product marketing manager at Sage, to get his insights on what businesses need to look out for now, including key dates, possible penalties and the importance of not leaving returns to the last minute.

What has happened since MTD for VAT was mandated to smaller VAT businesses on 1 April 2022?

We know that Making Tax Digital is the biggest legislation change to the UK’s tax systems in a generation. Back in 2015, when it was originally announced, the intention was to digitise all kinds of tax submissions by 2020. However, the initial timeline was revised. and the programme really started with the first mandate back in April 2019 (for VAT-registered businesses with taxable turnover over £85,000).

Now that the first wave of MTD changes has ended – with the mandate for the remaining VAT-registered population back in April last year. Essentially, all VAT-registered businesses are now legally required to comply with MTD rules.

The mandate is law, and if any impacted business is yet to comply with the MTD rules around digital record-keeping and digital VAT return submissions, that business will be penalised as the date for closure of VAT online accounts has already passed.

So, when did VAT online accounts close?

From the 1 November, businesses will no longer be able to use their existing VAT online account to file their quarterly or monthly VAT returns. VAT registered businesses must now sign up for Making Tax Digital (MTD) and use MTD-compatible software to keep their VAT records and file their VAT returns.

From the 24 August, HMRC started contacting businesses that still need to sign up and get MTD-compatible software before November. Businesses that file annual returns will still be able to use their VAT online account until 15 May 2023.

How were businesses informed of this important change?

As mentioned, HMRC launched a communications plan that kicked off on 24 August 2022.

Mandated businesses yet to comply with the new regulation then heard about the new requirements through a series of emails or letters that informed them how to comply with the changes and what happens if they do not.

Since the 1 November, anyone who attempts to log in to their VAT online account will be informed that they are no longer available for quarterly and monthly filers.

Does that mean there will be any penalties for businesses that do not comply with Making Tax Digital?

New penalties for late submission will be applied to businesses if they do not meet obligations to submit their VAT return to HMRC on time.

Instead of receiving an automatic penalty from HMRC for every late submission, they will incur a number of points each time they miss a deadline and only be penalised if they hit a certain threshold.

The new penalty system applies to any VAT submissions for tax periods starting on or after 1 January 2023.

More information about how the new penalty system works can be found here.

Moreover, if a VAT-registered business files its VAT returns but does not use MTD-compatible software, it may receive a Filing Through the Incorrect Channel (FTIC) penalty.

The amount businesses may be charged is dependent on their turnover. For the businesses impacted by the mandate on 1 April 2022, that penalty applies to each return filed incorrectly, and the penalty would be £100 as their turnover will be below £100,000.

Making Tax Digital is bringing some big changes. What are the benefits?

I understand how daunting it can be to change ways of working when it comes to managing taxes. Most people are happy with how they currently do things, especially those with very small businesses that juggle multiple tasks and seek to focus on making sure their business is profitable.

But, Making Tax Digital and the adoption of digital accounting has many benefits for the taxpayer. Digital records and software help reduce common mistakes so taxpayers do not pay too little or too much. It reduces the scope for error by implementing automation and error checks that help improve accuracy.

Accounting software is built to automate and optimise repetitive admin tasks, which helps free up time, and this is something so important for any business – but especially the smaller ones.

Ultimately, MTD was implemented to make tax administration more effective, more efficient, and easier for taxpayers to get their tax right.

Any final thoughts?

One thing that hasn’t changed from paper to digital returns is that it’s best not to wait until the last minute to get things sorted.

Keep this four-step process in mind…

Step 1. Choose MTD-compatible software like Sage Accounting.

Step 2. Check the VAT configurations in software ahead of authentication with HMRC.

Step 3. Keep digital records for current and future VAT returns.

Step 4. Sign up for MTD at least seven days before your return is due, allow software to work with MTD, and file your VAT returns directly to HMRC.

Remember: MTD is not automatic. Even if your business already uses software to keep records and to file VAT returns online, you must not forget to sign up for MTD before you file your next return.

Thanks, Fabiano. Our readers report that Making Tax Digital has really helped to make tax more efficient. This is particularly true when they’re able to use accounting software that can connect with their bank account to get a 360-degree view of their business finances.

Small Business was speaking to Fabiano Rocha, product marketing manager at Sage.

This article was written as part of a paid-for content campaign with Sage.

The post Making Tax Digital: The closure of VAT online accounts appeared first on Small Business UK.

Put simply, MTD is the government initiative to digitise the tax system and is being introduced in multiple stages over the next few years.

Since April 2022, MTD for VAT has applied to all VAT-registered businesses, with MTD for Income Tax set to be introduced in 2026. MTD for Income Tax was initially due to come into effect in 2024. However, due to the cost of living crisis, the UK government has delayed the mandate to relieve additional pressure from small business owners.

Also, in the most recent update, there is no mention of MTD for Corporation Tax. As it stands, HMRC is not expected to introduce a new MTD for Corporation Tax mandate prior to 2026. But it is expected that the mandate will require corporations to digitally record and submit their accounts and make quarterly updates to HMRC.

HMRC hopes the new system will be fairer and more efficient and make it easier for businesses and individuals to get their taxes right.

In this article, we’re aiming to clear up any remaining confusion by busting nine common MTD myths. 

1. You’ll pay more tax with MTD

Provided you’ve been doing your tax returns correctly, you shouldn’t be paying any more or less tax than you were already. MTD is just trying to account for the billions of pounds in unpaid tax that’s lost to avoidable errors and fraud every year.

HMRC is still collecting the same old taxes, it’s just trying to improve the way they’re calculated and reported so that the system is fairer and more accurate.

2. All your accounting must be 100% digital

While MTD does require businesses to keep digital records, it doesn’t necessarily require you to fully digitise your accounting.

For example, you may be able to continue sending paper-based invoices to your clients and receiving paper receipts – you just need to make sure this data is transferred to a digital format in your accounting software as soon as possible.

That said, a 100% digital accounting process will make your life easier by reducing admin and giving you more time to spend on the more vital aspects of running your business. If you use your accounting software to issue invoices, that data is automatically digitised, with no need to do manual uploads later.

>See also: Making Tax Digital for VAT: 6 simple tips to get your business ready

3. MTD means I don’t need to submit a tax return

Under MTD rules, you still need to submit regular returns, you just need to submit them in a digital format.

If you’re a VAT-registered business, you should continue to submit quarterly VAT returns through your accounting software.

This will also be the case with MTD for Income Tax when that comes into effect in 2026. However, the Self-Assessment tax return will be replaced by an annual ‘final declaration’. In practice this means that by the end of your accounting period, and 31 January each year at the latest, you must submit an end-of-period statement for every business you own detailing your business income and expenditure for that year.

Then, by 31 January following the end of the tax year, you must make a single final declaration of all your business and non-business income to calculate your tax and National Insurance.

4. HMRC needs all your accounting data

While you might be concerned that MTD will require you to make more of your accounting data available to HMRC, so far, businesses haven’t had to provide any more data than they did under the previous system.

However, for MTD for Income Tax, you will have to provide data more frequently. Under the new system, you’ll be required to submit at least quarterly reports to HMRC detailing your income, allowable expenses, and any adjustments or reliefs.

There’s no legal requirement for these reports to be completely accurate. Instead, these give both HMRC and you a better idea of your tax position, which can help you to better assess your cash flow in advance of having to settle your eventual tax bill.

5. I have an accountant, so I don’t need to do anything for MTD

Yes, your accountant can continue to prepare your books and file digital returns on your behalf, but that doesn’t mean you can forget about MTD.

Your main ongoing responsibility will be maintaining digital records in HMRC-approved accounting software. Thanks to smartphones, this has never been easier. You can use apps to send digital invoices, review paperwork, and even digitise paper receipts. Your accounting app will also allow you to monitor your cash flow and stay on top of taxes.

Make sure to discuss record-keeping with your accountant, so that you can agree on a consistent and reliable process and avoid any hassle when deadlines are approaching.

6. MTD for VAT doesn’t affect me because I voluntarily registered my business for VAT

When MTD for VAT was first introduced in April 2019, voluntarily registered businesses were exempt.

However, as of April 2022, MTD for VAT has been expanded to all VAT-registered businesses regardless of turnover, including those that are voluntarily registered for VAT.

>See also: Making Tax Digital for VAT post-April: What now?

7. MTD doesn’t affect small businesses

As discussed above, MTD for VAT now includes all businesses regardless of turnover. Even the smallest businesses now have to use software to keep accounting records and file digital returns.

However, when MTD for Income Tax is introduced in 2024, it will only apply to businesses with turnover over £50,000 and subsequently to general partnerships with over £30,000 turnover from April 2027.

Any sole traders, partnerships, or landlords with an income of below £30,000 will be exempt until a review has taken place.

However, although HMRC hasn’t made any announcement yet, there’s always the possibility that this could change in the future.

8. I don’t run a business so I can forget about MTD

You might not run a business, but if, for example, you’re a landlord with a few properties, and your rental income is above £50,000, MTD for income tax will apply to you from April 2026.

Likewise, if you’re in full-time employment but have a side hustle as a freelancer that nets you a supplementary income of more than £30,000, you guessed it, you’ll need to follow the rules for MTD for Income Tax come 2027.  And that goes for any VAT-registered individual too.

I’ve checked and I’m definitely not under the scope of MTD, so there’s nothing to do, right?

You might be right, but HMRC is introducing other MTD-related initiatives that could affect you if you’re a sole trader.

Basis period reform

For most sole traders, your accounting date (the date at which you draw up your accounts) and basis period (the period for which you’re liable for tax) match the tax year, 6 April to 5 April.

However, some sole traders, especially those that have seasonal trading or that work with foreign businesses, choose accounting dates and a basis period that don’t match the tax year. This means they can be taxed twice on their profits in their first years of trading, which they currently can’t claim back until their business closes.

To make things fairer, following a transition period in 2023/24, all sole traders or unincorporated businesses, regardless of when their accounting dates are, will have to use the tax year for their basis period and 5 April for their taxable date.

Points-based penalties

A new points-based penalty system will be introduced in January 2023.

Instead of receiving an instant fine for late submission, you’ll incur points. Once you reach a certain threshold for points, you’ll be fined.

This currently only applies to MTD for VAT but will also apply to MTD for Income Tax from April 2026.

Next steps for Making Tax Digital

Hopefully, you’re now clearer on how MTD applies to your business and what your responsibilities are.

Ultimately, MTD should make it easier for you to get your taxes right and to be sure that you’re paying a fair and correct amount of tax to HMRC.

This article was written as part of a paid-for content campaign with Sage.

The post 9 myths about Making Tax Digital busted appeared first on Small Business UK.

Originally set to come into effect in April 2024, the Making Tax Digital (MTD) for Income Tax Self-Assessment (ITSA) mandate is considered one of the biggest changes to UK tax system legislation this side of the millennium.

This overhaul of how our country processes its taxes was first announced in 2015 as a means of improving efficiency and reducing instances of tax fraud. However, HMRC recently announced that the mandate will be postponed for the third time until 2026.

Understanding MTD and the changes to self-assessment taxes is extremely important, especially for small businesses. So, if you’re still in the dark when it comes to the new rules, here’s the lowdown.

What is Making Tax Digital for Income Tax Self-Assessment?

Making Tax Digital is part of the UK government’s overall plan to fully digitise the tax system (MTD for VAT has already been launched). Currently, small businesses and self-employed workers are required to file their taxes to HMRC annually and can keep the records of their books in any format they see fit (digital or on paper).

Under the new mandate, those filing their ITSA will be required to keep a digital record of their earnings and provide quarterly updates.

However, not all small businesses will be required to do this right off the bat. In the first year of its implementation, only business owners and self-employed workers earning more than £50,000 per year will be mandated to join. Then, the following year, those earning more than £30,000 will be required to join.

> See Also: Making Tax Digital: What’s Changing

When has it been postponed until?

The launch date of MTD for ITSA has been moved from April 6 2024 to April 6 2026, allowing small business owners to prepare for the change.

In a statement, HMRC announced, “The mandation of MTD for ITSA will now be introduced from April 2026, with businesses, self-employed individuals, and landlords with income over £50,000 mandated to join first.”

Why has MTD for ITSA been postponed?

The key reason for postponing MTD for small businesses is to relieve some of the pressure business owners are facing due to the current economic crisis. While there are many benefits of digitalising income tax self-assessment, the move will feel like a big change for many self-employed individuals and business owners. 

In an official statement, the Financial Secretary to the Treasury, Victoria Atkins, said, “It is right to take the time to work together to maximise the benefits of Making Tax Digital for small businesses by implementing the change gradually. It is important to ensure this works for everyone: taxpayers, tax agents, software developers, as well as HMRC.” 

>See Also: Self-employed Making Tax Digital faces delay until 2026

Are there any other changes?

When initially announced, MTD would require all taxpayers earning over £10,000 annually to begin filing all their books digitally as of 2024. However, in line with the intention to minimise strain on self-employed taxpayers, small businesses and landlords, HMRC changed the financial threshold along with the postponement. As a result, only those earning above £50,000 will be required to join MTD in 2026. Following that, those earning £30,000 will join MTD in 2027, and a review of the new digitised system will be taken to assess how MTD can benefit those earning less than £30,000.

The penalty system for late payments has also changed. The new system is designed to be fairer and less severe than previous HMRC penalisation policies.

The new late payment penalty system is points-based. For each late payment, one point is applied. And, for those issuing ITSA quarterly, four points need to be acquired before a penalty is given. This penalty will be a fine of £200.

When should I start thinking about MTD for ITSA?

Despite the postponement of MTD, it’s still advisable to start thinking about the changes you might need to make now. That way, when the deadline rolls around, you won’t be rushing to understand a new system. 

Also, with all the benefits of digitalising your income and finances, such as improved profitability, task efficiency, client value, more informed decision making and mistake reduction, getting your head around the new way of doing things could start benefitting your business now. 

But, if you’re unsure how to prepare your business for MTD, speak with a tax professional.

Alternatively, you can find advice and tips in Sage’s Making Tax Digital hub.

This article was written as part of a paid-for content campaign with Sage.

More on Making Tax Digital

Making Tax Digital: The closure of VAT online accounts

Basis Period Reform and Making Tax Digital: Everything you need to know

9 Myths about Making Tax Digital Buster

The post Making Tax Digital for Income Tax: The lowdown appeared first on Small Business UK.

Millions of self-employed are now off the hook when it comes to filing quarterly Making Tax Digital income tax returns – for now.

HMRC has postponed rolling out its Making Tax Digital system for millions of freelancers.

Previously any self-employed person earning more than £10,000 was going to have to start filing quarterly digital tax returns from April 2024.

>See also: Self-employed Making Tax Digital faces delay until 2026

This has now been pushed back to April 2026 – but only for the self-employed generating over £30,000 in income.

Which means millions of freelancers will not have rent expensive software to stay compliant for the time being.

For any freelancer earning between £30,000 and £50,000, the new system will be postponed until April 2027.

>See also: Making Tax Digital for VAT post April – what now?

Any freelancer earning more than £50,000 being given a two-year extension until April 2026.

Right now, only businesses registered for VAT – i.e., those earning more than £85,000 a year – have to go through Making Tax Digital.

Small business owners have dug their heels in about having to rent expensive accounting software from third vendors in order to file their online tax returns.

Making Tax Digital for self-employed – what’s changed

HMRC has decided to suspend the rollout of Making Tax Digital for income tax due to problems with its own internal IT system plus concerns over little awareness of the reforms from microbusinesses.

According to recent research by accounting software provider FreeAgent, more than 50 per cent of small businesses thought the Government had not provided enough information about Making Tax Digital, while just one in ten small business owners were confident that they understood everything about the next stage of the legislation.

Roan Lavery, CEO and co-founder of FreeAgent, said: “Considering this general lack of awareness – and with time running out before the deadline for the next phase of the legislation [MTD for ITSA] was due to be implemented – it was always possible that the government would choose to postpone it. There’s just no way that everyone affected would have been ready to comply with the changes in such a short space of time.”

Jim Harra, chief executive of HMRC, said that the changes were being paused to “make sure we get this right and deliver it effectively”.

However, tax experts said the U-turn was a blow to the department’s credibility.

HMRC claimed that forcing people to declare earnings and pay their tax more regularly would have helped to vastly reduce the £32bn that it says is underpaid in tax each year, or 5.1 per cent of the UK’s annual tax bill.

HMRC had planned to pilot MTD for corporation tax in 2024 and was scheduled to roll it out in 2026, but Paul Falvey, tax partner at business advisory firm BDO, told the Financial Times this may now “prove too big a risk” as it would coincide with the launch of MTD for income tax and would be “a lot of work for HMRC’s IT team to handle in one year”.

Tim Stovold, head of tax at accounting firm Moore Kingston Smith, told the newspaper that MTD is becoming “the Crossrail of tax reform”.

Further reading

Making Tax Digital 101: a guide to MTD

The post Making Tax Digital mothballed for millions of self-employed appeared first on Small Business UK.

Making Tax Digital, the Treasury’s drive to digitise how we file tax returns and make VAT more transparent, is changing in April. Small Business sat down with Fabiano Rocha, product marketing manager at Sage, who explains what’s changed.

What’s changing about Making Tax Digital in April?

Making Tax Digital is the biggest shakeup to the UK’s tax systems to date; that’s why everyone from HMRC to your accountant and companies like Sage have been going on about it for the last few years.

Although back in 2015 the intention to get all kinds of tax submission to be done digitally by 2020, after public consultation and due to the impact of disruptive events like Covid and Brexit, the 2020 timeline got revised a few times to what the current dates are.

The first changes were implemented in 2019 for VAT-registered businesses above the £85,000 taxable turnover threshold. Those below the mandatory VAT registration threshold were invited to join if they wanted to, but they weren’t required to do so. This is what changes on the 1 April 2022. All VAT-registered businesses will now have to comply with the MTD rules, which effectively impacts the businesses below the £85,000 taxable turnover threshold. However, it’s worth mentioning that the timelines to when a business is affected can vary.

So, if that’s the case, when’s my first VAT return due under MTD rules?

This will be for your first full VAT period beginning on or after 1 April. That’s when you’ll be required to start keeping digital records and submitting your VAT returns digitally to HMRC.

To try to make this easier, let me give you an example using the standard quarterly VAT accounting periods:

If your quarterly VAT period ends on the 31 March for example, then you will need to start complying with Making Tax Digital rules for the period starting on 1 April.

However, if your quarterly VAT period ends on 31 May for example, you’ll only be required to follow the new MTD rules from the period commencing 1 June.

This is also valid for businesses with monthly and annual period, so keep in mind what the VAT accounting periods look like.

But it’s also important to know when to register.

>See also: Making Tax Digital for VAT: 6 simple tips to get your business ready

When should a business register by?

It’s important to highlight that MTD doesn’t happen automatically. Businesses, either themselves or their accountant, must register in time to submit their first VAT return under MTD rules. If businesses sign up late, they risk overlapping with the older VAT system, including accidentally making double payments, which is something nobody wants.

The timelines to keep in mind are:

1. If the business pays by Direct Debit, do not sign up less than seven days before the VAT Return is due or less than five days after your VAT Return is due.
2. If the business does not pay by Direct Debit, then sign up at least three days before your VAT Return is due.

As a side note, keep in mind that businesses will be invited to set up a new direct debit for MTD for VAT if that is the way they pay.

Can a business be exempted from these changes?

Businesses can’t just opt out of any MTD scheme. This includes MTD for VAT. If they’re eligible then, by law, they need to register in time for any deadlines and keep your VAT records digitally, as well use the right kind of compatible software to submit tax returns or other required updates.

But the Government does allow exemption for some people it believes are digitally excluded.

These might be people who live so remotely that they simply haven’t got an internet connection. Therefore, they can’t submit a VAT Return online, so can’t follow the MTD for VAT rules.

Also included are people whose disabilities or age make using a computer difficult or impossible. Some religious beliefs can also mean people are exempt because they’re prohibited from using a computer.

If a business believes any of these apply to them, then they should speak to HMRC. That’s important because they can’t just declare they’ve decided they are exempt. They need to ask HMRC to grant an exemption. This can be done by calling or writing to them and stating your case. But, ultimately, the decision rests with them.

If HMRC does decide a business can be exempted, then they’ll continue submitting VAT Returns in the way they always have, such as by filling in a VAT Return paper form and posting it to HMRC.

What type of software can I use?

Businesses need to adopt software that enables them to digitise their VAT record keeping and to submit their VAT Return digitally and directly to HMRC. That can be done by either adopting a compatible software package like Sage Accounting that allows them to carry out both requirements; or by using bridging software to connect non-compatible software (like spreadsheets) to HMRC systems.

Most people use accounting software to ensure they are compliant with those two key requirements just mentioned. Most leading accounting software has mobile apps that make capturing and digitising data easy, which will help you not overlook this vital step in MTD compliance. Also, accounting software is likely to offer several automated processes that can ease a lot of the old-fashioned work of accounting, such as reconciling payments against invoices, automatically apply the correct VAT rates, live calculation of VAT bills for ongoing period and providing insights on cash flow.

What if I still use spreadsheets?

If you use a spreadsheet for your VAT accounting, then it is possible to continue doing so considering the above requirements. But you run the risk of losing data by accidentally overwriting the contents of a cell, breaking a formula that could generate incorrect outputted data or breaking the digital link between source of records and the VAT output, for example.

Spreadsheets can meet compliance needs but they’re not the most reliable way to store data. And when the law requires you to store certain kinds of data in specific ways, they start to unravel surprisingly quickly.

As businesses are required to go through this digitisation process to remain compliant with these MTD changes, it is advisable that best practices are adopted from the get-go to make the transition easier. Therefore, it only makes sense to use it as a lever to boost productivity and day-to-day admin of impacted businesses.

So, to close off, should our readers be aware of any more MTD dates in the future?

Yes, certainly. As I mentioned before, the Making Tax Digital programme had its timeline revised and will affect different types of tax. All VAT-registered businesses will be impacted by Making Tax Digital as of April 2022, but it doesn’t stop there. MTD will have then affect Income Tax Self Assessment (ITSA) in 2014 for self-employed professionals and those with property rental income with earnings above £10,000 and, in April 2015, for general partnerships. Then, Corporation Tax is set to be impacted from April 2026 at the earliest.

What should I do now?

What I’d suggest is that even if you’re not impacted by changes now, that you still consider adopting best practices as soon as possible. Not only will this make the transition easier, but you’ll benefit from improving your daily admin, saving you time on tedious tasks. If you work with an accountant, this will also help you have much more informed and productive conversations with them, especially if you are on a tight budget.

Thanks, Fabiano. Our readers report that Making Tax Digital really helps when connected up to your accounting software and your bank account, giving you a 360-degree view of your business

Small Business was speaking to Fabiano Rocha, product marketing manager at Sage

This article was written as part of a paid-for content campaign with Sage

More on Making Tax Digital

What is the HMRC penalty system for Making Tax Digital?

The post Making Tax Digital for VAT post April – what now? appeared first on Small Business UK.

As well as a new, digitised tax system, Making Tax Digital Making Tax Digitalfor VAT will also see the introduction of two new HMRC penalty regimes for late submissions and late payments, which will subsequently apply to Income Tax Self Assessment.

As long as you continue to be diligent about deadlines, there’s nothing to worry about – HMRC’s new approach is designed to be fairer and less severe, which it hopes will promote more timely submissions, resulting in fewer penalties.

This article will explain how the new systems work, when they come into force, and what your responsibilities are.

When do the HMRC penalty systems come into force?

The new penalty systems will apply to any VAT submissions for tax periods starting on or after 1 January 2023.

They were originally scheduled to be introduced alongside the full rollout of MTD for VAT this April, but were pushed back by nine months due to deficiencies in HMRC’s IT system.

The new systems will also apply to Income Tax and Self Assessment (ITSA) and will be introduced on 6 April 2024 for ITSA customers who are mandated for MTD and 6 April 2025 for all other ITSA customers.

What is the new HMRC penalty system?

The new penalties for late submission will be applied to you if you fail to meet your obligations to make submissions to HMRC on time.

Instead of receiving an automatic penalty from HMRC for every late submission, you’ll incur a number of points each time you miss a deadline, and only be penalised if you hit a certain threshold.

How do the late submissions penalties work?

You’ll rack up points for every missed submission deadline, and be charged a financial penalty of £200 when you reach a certain threshold.

The thresholds, which are determined by how often you’re required to make a submission to HMRC, are as follows:

• Annual – 2 points
• Quarterly (including MTD for ITSA) – 4 points
• Monthly – 5 points

Crucially, you’ll have different points totals for MTD for VAT and  ITSA. So if you reach the points threshold for late VAT returns and subsequently for Income Tax, you’ll be charged two separate £200 penalties.

In most cases, to make compliance easier, even if you have two or more failures relating to the same submission obligation in the same month, you’ll only incur a single point.

However, this rule will not apply across multiple MTD for ITSA submission obligations. For example, if your regular quarterly submission deadline, End of Period Statement (EOPS) deadline, and final declaration fall in the same month, and you missed all three, you’d incur three penalty points.

If you have multiple businesses and are required to submit separate regular ITSA updates for each one, you’ll have one points tally that will cover all your business responsibilities under ITSA.

Do the penalty points expire?

Each penalty point lasts for two years before expiry. The lifetime of a point begins the month after the month in which it was incurred.

However, if you’re at the penalty threshold, your points will not expire.

You can actively reset your points by meeting two conditions. You can do this for individual points or for multiple points. If you are at the points threshold, this is the only way you can reset your points back to zero.

In order to reset your points to zero, you must:

• Condition A: Meet all submission obligations for a period of compliance dependent on your submission frequency – 24 months for annual, 12 months for quarterly, and 6 months for monthly submissions
• Condition B: Have submitted all submissions due within the preceding 24 months, whether they were initially late or not

What are the new late payment penalties?

As well as the new late submission penalty system, HMRC has also introduced a new late payments penalty system, which is automatically applied if you fail to pay on time.

It operates on the following timeframes:

• Up to 15 days overdue: no penalty
• Up to 30 days overdue: 2% of the amount on top of the payment due
• Day 31 overdue: 2% of what was due on day 15, plus 2% of what was due on day 30
• More than 31 days overdue: first penalty calculated at 2% of what was due on day 15 plus 2% of what was due on day 30 and a second penalty calculated at an annual rate of 4% of the outstanding amount, applied daily

As with other HMRC penalty systems, variable interest rate based on the Bank of England base rate is also applied.

Can I challenge a penalty?

Yes, if you think you have a reasonable excuse for missing a deadline, you can challenge a penalty or point. You can make your case through the internal HMRC review process. If you don’t agree with the outcome, you can appeal to the First Tier Tax Tribunal.

What next?

As long as you do everything you can to meet your submission obligations and make payments on time, you have nothing to worry about from the new penalty systems.

The best thing you can do to avoid fines is to get your business processes ready for MTD. Find out more about how to prepare on Sage’s Making Tax Digital hub.

This article was written as part of a paid-for content campaign with Sage

Read more: How to use MTD to get VAT right

The post What is the HMRC penalty system for Making Tax Digital? appeared first on Small Business UK.

Making Tax Digital for VAT requires you to keep digital VAT records and submit VAT returns using compliant software. Failure to do so could result in penalties.

But don’t worry if you’re feeling uncertain or wary about the coming changes. Just follow these six simple tips and you’ll be ready for MTD for VAT.

1. Check the deadlines for your business

You need to be aware of 3 separate deadlines for MTD for VAT.

• Following the rules – you must start keeping digital records from the first full VAT period that starts after 1 April 2022
• Signing up – to avoid overlap with the existing system, you must sign up for MTD for VAT either seven days before your first return is due or five days after your first return is due
• Submitting your first return – your first quarterly return must be submitted one month and seven days after the end of the VAT quarter at least (e.g. by 7 October 2022 for VAT period beginning 1 March

2. Choose MTD-compliant software

You need to already be using MTD-compliant accounting software in order to register for MTD for VAT. Ask your software supplier or check the HMRC website if you’re unsure.

3. Ask your accountant

Your accountant is your best resource when it comes to MTD for VAT. They’ll be very familiar with the process after the first wave of onboarding in 2019, and will be able to give you tailored advice on how to prepare and make MTD for VAT work for you. You may also be able to link your accounting system to theirs to give them easy access to essential data.

4. Educate your team about MTD for VAT

MTD for VAT affects all your accounting processes and any staff involved in those processes. From purchasing to sales and finance, make sure everyone in your organisation is ready to adapt to digitisation. Team leaders can read HMRC’s VAT Notice 700/22 and be responsible for ensuring compliance across their departments.

5. Prepare for the next phases of MTD

MTD for VAT is just the start of HMRC’s plan to digitise the tax system.

From April 2024, sole traders and landlords with income over £10,000 per year will have to comply with MTD for Income Tax. From 2025, it will also apply to general partnerships. Then, in April 2026, MTD for Corporation Tax will be introduced.

Those dates might seem a long way off, but the more work you do now to prepare your processes, the easier it will be to adapt to MTD for Income and Corporation tax when they eventually arrive.

6. Check whether your business has to comply or not

HMRC will consider exceptional circumstances as a valid reason for exemption from MTD for VAT, such as inability to use a computer or go online due to a disability or religion, or living somewhere so remote that there’s no internet connection.

If you think you fall into this category, you’ll need to call the HMRC helpline and make your case for exemption to customer support. They’ll consider your personal circumstances and make a decision based on the facts.

What next?

If you follow the above steps, you have nothing to worry about with MTD for VAT. HMRC’s aim is just to make the tax system fairer, easier, and more transparent for all.

If you’re still unsure, or you want more advice and guidance, you can find plenty of information on Sage’s Making Tax Digital hub.

This article was written as part of a paid-for content campaign with Sage

Read more: How to use MTD to get VAT right

The post Making Tax Digital for VAT: 6 simple tips to get your business ready appeared first on Small Business UK.

Small Business has teamed up with Sage to bring you a webinar to help you understand Making Tax Digital, how to prepare for it and guidance to make sure you’re compliant.

When: Thursday March 24, 12pm – 12:30pm
How to join: Sign up through this website

What is Making Tax Digital?

Making Tax Digital (MTD) is the shift from paper-based tax reporting to online tax reporting for UK businesses. It’s being rolled out in stages, with the next stage taking place in April 2022.

>See also: Making Tax Digital April 2022 – what’s changing

What’s on the agenda?

Introduction: Lawrence Gosling, Editorial Director, Small Business

Lawrence Gosling, Editorial Director at Bonhill Group plc, will open the webinar and highlight the main areas of focus that will be discussed around Making Tax Digital

Presentation: SAGE, Making Tax Digital

In this presentation, Sage will present five practical steps businesses can take to get MTD right:

• Know Your Dates – What are the dates I need to keep in mind post-1 April?
• Know How to Comply – What do I need to do to be compliant with MTD for VAT changes?
• Know Your Options – What’s the difference between accounting software and bridging software?
• Know Why to Adopt – What are the benefits of adopting accounting software?
• Know What to Adopt – What does Sage Accounting do for me and my businesses?

Fireside Chat: Panel Discussion and Audience Q&A

In this fireside chat, we will explore all your questions around MTD, while providing any other information that your small business needs to know about getting the new tax submission system right. We will discuss:

• Does MTD apply to all small businesses? Are there any exemptions? 
• What key things do SME owners need to do after April to ensure they get MTD right? 
• Does MTD mean more or less work for business owners compared to the previous tax system? 
• Do small businesses with an accountant still need to worry about MTD? 
• Will businesses pay more tax as a result of MTD? 
• Is accounting data less secure as a result of MTD? 
• Has the penalty system changed as a result of MTD?

Who are the speakers?

The following three people will be speaking at the online event:

Chris Downing

Director for Accountants & Bookkeepers, Sage

Chris joined Sage having been a partner at a top 100 accountancy firm. He brings nearly 20 years of hands-on experience and strategic insight of the profession, coupled with an infectious enthusiasm in the adoption of technology and Business Intelligence to improve reporting and drive innovation in the SME sector.

Becca Chappell 

Project Manager – Compliance, Sage

As Product Manager for Compliance Knowledge at Sage, Becca has detailed expertise of compliance changes in the UK & Ireland. With a background of Accountancy in both Practice and Industry, she brings a dual perspective to any upcoming changes and shares her expertise with colleagues and customers to ensure product compliance and promote best practices.

Fabiano Rocha

UK&I Product Marketing Manager, Sage

Bringing years of experience in understanding customer needs to inform product development and marketing campaigns, Fabiano has delved into the challenges of the small business accounting to help self-employed professionals and entrepreneurs save time with admin tasks by adopting cloud accounting software. 

Read more

What is Making Tax Digital and why should you care?

The post Live webinar – 5 practical steps to get ready for Making Tax Digital appeared first on Small Business UK.

Making Tax Digital (MTD) is the government’s plan to digitise the tax system in order to make it more effective, more efficient, and easier to get right.

Whether you’re aware of MTD, but are not sure what steps to take to comply, or this is the first time you’re hearing about it, this guide will answer all your burning questions and help you prepare.

We spoke to Jonathan Dowden, Product Marketing Manager at Sage, to find out how MTD will affect small businesses, and how using an accounting partner can help.

What is MTD?

Dowden: “MTD or Making Tax digital is the government initiative to bring the tax system into the 21st century.

“MTD for VAT was first introduced in April 2019, though only for businesses with a taxable turnover of more than £85,000. From April 2022, all VAT registered businesses will have to comply. You’ll be required to keep digital records and submit a VAT return from within MTD-compliant software.

“Then, from 6 April 2024, any self-employed person, or landlord with an annual income of more than £10,000 will be required to comply with MTD for Income Tax Self Assessment (ITSA). If your earnings are below £10,000, you’ll continue to use the existing Self Assessment system.

“At the moment, for Income Tax and Self Assessment, everyone keeps records, and then on 31st January, you’ve got to submit all your details through your self-assessment tax return, pay what you owe, and that’s the process done.

“With MTD ITSA, rather than it being a once a year event, you need to submit more regularly – no fewer than once a quarter – and there’s a legal requirement for you to keep digital records. At the end of the year, you’ll do an end of period submission, which involves taking all the submissions you’ve made over the year, making sure everything is accurate, making any adjustments, and then making a final declaration, and paying the tax.”

Does MTD apply to all small businesses?

As stated above, MTD for VAT software will apply to all VAT-registered businesses, regardless of their taxable income.

According to HMRC, if it’s not possible for you to use computers or the internet, as a result of age, disability, religion, or location, you can apply for exemption for MTD. Exemptions will be decided on a case-by-case basis, though HMRC has stressed that you’ll need to have a very good reason in order to be considered exempt.

What key things do SME owners need to do to ensure they’re ready for the introduction of MTD?

If you’re not already prepared for MTD for VAT, it’s time to review your digital record-keeping, check your software or bridging software is MTD-compliant, and if you have one, speak to your accountant about your responsibilities.

Learn more about how to use MTD to get VAT right here.

Dowden: “The single biggest thing that anyone can do to prepare for MTD ITSA right now is not to wait until the deadline, but start keeping digital records now, so that they’re safe, they’re secure, and they’re in one place. Then you need to start reading up on MTD and understand how it’s going to impact your processes. At Sage we have a whole hub dedicated to MTD.

“You might then want to get advice from an accountant or a tax professional and plan how you’re going to keep digital records, how you’re going to categorise them – what’s tax deductible, what’s not – and come up with a skeleton process so you’re ready for when MTD becomes mandated.”

How can an accounting software partner help? Dowden: “Sage Accounting is absolutely perfect for keeping digital records. For example, you can create and send professional looking invoices to your customers, you can record payments, and you can make it easier for customers to pay you. And what you’re doing there is creating digital records, in a completely secure location in the cloud, instead of having to do an additional process.

“You can also connect your bank account to Sage, so all transactions that go through your bank account then get sent straight to Sage Accounting. And can also set up rules. For example, if you see BP coming into your account, you can set up a rule that says it needs to go to vehicle expenses. So not only are you capturing it, but you’re putting it in the right place so it’s ready for tax time.

“You can also capture a photo of that receipt with our mobile app. So now you have the transaction, in the right place, with the right bit of paper attached to it. No more will you be hunting around the glovebox, carrier bag, shoebox – it’s all there.

“We’ll also be introducing functionality that will allow you to do the quarterly submissions to HRMC direct, do the end of period statement, and final declaration from within the app. Plus, if at any stage you want to get some help, you’ll be able to connect to an accountant from within the software.”

Does MTD mean more or less work for business owners than the previous tax system?

Dowden: “At first you might look at MTD as a small business owner and think that it will be hard to make the change to the new tax system. But what you’re actually doing is incorporating all the hard, administrative work into your digital record-keeping. As a software provider, Sage can then capture all that data and organise it, which makes it easier for your accountant to prepare your accounting information for submission to HMRC.” .

“And actually, this could drive you to digitise your processes, which, rather than creating a huge amount of work, is going to strip a lot of work out, because it’s going to be automated. Using a software provider like Sage is a lot more robust than a spreadsheet and will eliminate a lot of manual administration.

“Because you have all this information organised in your accounting software, it’s a lot easier to get insights into your business, which you can use to make decisions. For example, you can check if a supplier owes you money, or assess your profitability, and quickly act on that information. It’ real data, at your fingertips, whenever you need it.”

Do small businesses with an accountant still need to worry about MTD?

Dowden: “It’s not about being worried, it’s about being aware. If you’re working with an accountant and they’re currently doing your income tax self-assessment, you like to think you’re their most important client, but they’ve got lots of other clients who think like that as well.

“So you need to make sure as a business owner that you also know what to do, and can collect the data digitally, so that it’s easy for your accountant to complete the submissions for you.

“The digital record keeping is a legal requirement, and it’s impossible for an accountant to do that for you and the rest of their client base.”

Will businesses pay more tax as a result of MTD?

Dowden: “MTD does not bring in any different tax rate changes and it doesn’t change when you pay your tax. It purely changes the way that you share information and send information into HMRC.

“If you prepare properly and you’re getting your data in in good time, your accountant will be able to make sure you’re paying the exact right amount of tax – not too much, not too little – and it becomes more efficient and accurate for you as a taxpayer, not only for HMRC.”

Is accounting data more or less safe as a result of MTD?

Dowden: “It’s as secure and as private as it always has been. The key thing to understand is that you are only sharing the data that you want to share. So you keep all of your data in Sage Accounting in the Cloud. What you put in the submissions is what HMRC sees, and all you need to share is what you’re legally required to share.

“Cloud Accounting systems are a lot safer than laptops, desktop PCs, or data backed up on a memory stick that could be lost or stolen. Security is a huge focus for us at Sage. Making sure our customer data is safe and secure is a core part of what we do.

Has the penalty system changed as a result of MTD? Yes, the government plans to introduce a new points-based penalty system from April.

Under the new system, instead of incurring instant fines for late submissions, businesses will be given points. When they exceed a certain threshold, they’ll be fined. This system will only apply to VAT for the time being. The existing fines will still be applied to Income and Corporation tax until they’re digitised.

Dowden: “The idea is that it gives people the benefit of the doubt, where there’s innocent mistakes made. If you’re doing your best to comply with the legislation, then that’s taken into account rather than someone who’s seen to be trying to avoid complying.”

Get ready for MTD and find out more about Sage Accounting products and solutions here.

This article was written as part of a paid for content campaign, in partnership with Sage.

The post Making Tax Digital 101: a guide to MTD appeared first on Small Business UK.

Following the extension of Making Tax Digital (MTD) for VAT to all businesses in April 2022, the next two stages of MTD are due to be phased in over the next four years.

That might sound like you have plenty of time to prepare, but as Lois Laughlin, Product Marketing Manager at Sage, tells us, there’s no time like the present to start adopting digital record keeping.

We discuss how the changes will affect the daily running of your business and get some top tips on best practice for the next phases of MTD.

What are the next stages of Making Tax Digital?

“The next stage is April 2024, MTD for Income Tax Self Assessment (ITSA), which will impact all unincorporated businesses and landlords with an annual business income of more than £10,000. Partnerships will then be included from April 2025 but only general partnerships or those with individuals as partners.”

“We know this is going to be a significant change to habits and behaviours for small businesses and how they work with their accountants. The fundamental change for all MTD, including MTD for ITSA is the need to sign up, maintain digital records, and then submit MTD compliant returns digitally to HMRC via a compatible accounting solution.”

“Finally, MTD for Corporation Tax, which has been going through a consultation phase, will be mandated no sooner than April 2026, with a proposed pilot to start around April 2024.”

How will the next phases of MTD impact small business owners?

“As small business owners will be required to keep digital records, the annual self assessment tax return that they do today will be replaced with periodic updates, which have to be submitted at least quarterly, an end of period statement based on those updates, and then a final declaration that effectively replaces the current SA100 tax return.”

“Looking at feedback from MTD for VAT, most business owner’s fears and concerns were about changing habits and behaviours from what they were used to and comfortable with. But those attitudes changed. Some businesses have reported wider productivity gains, reductions in errors, and those that adopt compatible digital software solutions have seen an improvement in working practices, saving time by eliminating manual processes, and has given them time back to focus on their business.”

“Overall, small businesses are reporting feeling much more confident and happier that they made the change. For the majority of people, tax will be easier to get right and harder to get wrong.”

The next changes are a long way off. How can small businesses prepare for upcoming changes?

“Now is the best time to start thinking about how you currently keep your records, the complexity of your tax affairs, and the timing of when you need to start complying – whether you plan to do it yourself or work with an accountant or bookkeeper.”

“Best advice would be to start planning transition sooner rather than later. If you do work with an accountant or a bookkeeper, it’s important to have those conversations and discuss how MTD will impact you and the way you tackle tax together.”

“It’s also worth noting from a small business perspective that your accountant will have many clients to support through the process, and for them, to ensure that everyone is ready and confident well ahead of the deadlines, they need to start having those conversations so it doesn’t bottleneck. They will want to ensure they have enough time to provide high standard support to every client.”

“And for your own benefit, in being able to gain the confidence to deal with MTD, it’s essential to get set up sooner rather than later, making sure that the relationships you have, the terms of engagement with your accountant or bookkeeper are agreed, and that you have your new processes and workflows in place. Do it because there’s value in doing so for you and your business, not just because HMRC says you have to.”

How can accounting software like Sage help to prepare for the subsequent stages of MTD?

“Digital bookkeeping gives you access to your records in real time, which gives you a live relationship with your accountant or bookkeeper, and shows you your financial position visually at a glance.”

“For example, you will be able to see estimated income tax liability at least at the of each quarter and plan accordingly. You can also audit your income and expenditure and review it on a timely basis rather than doing it six months after the tax year ends, which is what most people do currently. All submissions to HMRC to keep you compliant will be much easier and significantly quicker.”

“With digital bookkeeping solutions from Sage, you’re reducing, if not eliminating, manual paperwork and getting a much greater level of accuracy. No more fumbling through plastic bags full of receipts and trying to figure out a tax calculation from it”

“Keeping track of funds is something that small businesses who don’t do regular accounting struggle with. That can lead to not having your finger on the pulse of your cash flow, and you end up spending a lot of time figuring out your finances. With digital bookkeeping solutions, you always have a clear picture to hand. A lot of people think ‘bookkeeping and accounting is not my area of expertise, I don’t want to do it or I’m fearful of getting it wrong’. But actually, adopting digital record keeping gives you more visibility, more confidence, and you get back a lot of time to focus on what you are good at and to develop your business.”

“Those less comfortable with the idea of sitting at a computer can adopt a mobile first approach to capture and categorise everything in the moment simply using an app on your smart phone. That’s all that’s expected of you. Keep it simple, make it suitable for you and your business, and work with an accountant or bookkeeper if you choose to.”

How will these changes affect the daily running of a business? Can they turn it into a positive?

“Finding a solution that suits you and your business is absolutely critical: figuring out what that looks like in the day-to-day, from capturing your expenses right through to the tax submission.”

“Some businesses will have very simple income and expenditure transaction levels to capture. Others have much more complex trading behaviours with sales and purchase invoices, and may work on an accruals basis rather than a cash basis. Making the right solution of choice to work in sync with your workflows and process is important so take time to consider and seek advice if needed.”

“The positive value of embracing new workflows and processes will be much more important to you and your business than just ticking the box for MTD. You will reduce the amount of paperwork you have, ensure VAT returns are accurate, easily manage bookkeeping from one place, view real-time tax information when you need it, keep track of funds to stay on top of business, and ultimately get more time back to focus on your business.”

What best practices should businesses adopt for the next phases of MTD?

“68% of self assessment tax returns today are submitted by accountants and bookkeepers, where they do everything for their clients, which we would class as ‘do it for me’. The client just drops the paperwork off at their office and everything, from sorting, recording, calculating and submitting the tax return will be done for them. And then you have the other extreme of DIY business owners that are quite happy to do their self-assessment tax return themselves once a year.”

“In the next phases of MTD, research with self employed individuals and small businesses suggests that these approaches will converge in the middle increasing the number of businesses with a ‘do it with me’ approach. This is where businesses will seek support from their accountant or bookkeepers, and accountants and bookkeepers with concerns around whether they have capacity to do the extra work required for MTD will encourage their clients to get involved, even if it’s at a basic level.”

“Awareness and education around the changes is lacking across the industry, which can result in a lack of action. Best practice advice would be to reach out to accountants, bookkeepers, reputable software solution providers and or the small business community to ensure you are fully informed about MTD and how it will affect you.”

“Start making changes now. The more you do now the more confident you are going to be, and it won’t be a challenge when we reach the deadline in April 2024. Finally, do not leave it until the last minute.”

“In summary best practice is three simple steps:

Understand the changes that are coming and how they impact you – Keep up to date with HMRC, Sage and your accountant or bookkeeper

Review your current processes – if you are using software is it compatible? If you do things manually it’s time to go digital. If you use spreadsheets it’s time to take a step further and go fully digital.

If you have an accountant or bookkeeper or would like to work with one speak to them now, discuss and agree the best way to work together going forward.”

What about digital links? Are they sustainable?

“Digital links provides the ability to connect your records to the HMRC system, enabling you to submit the required information without any manual intervention. A client using a spreadsheet for VAT needs a bridging solution to connect the spreadsheet to HMRC through their APIs.”

“For income tax, how sustainable it would be to work from spreadsheets is questionable, because at the minute there are no bridging solutions for MTD for ITSA on the market. There may well be over the next two years, but I’m not sure how accurate and sustainable that would be, as it’s a much more complex process and workflow.”

“Digital links from a spreadsheet to HMRC is a very clunky and time consuming process. Alternatively, there are MTD ready, compatible solutions out there like Sage Business Cloud Accounting that will facilitate that process seamlessly, right from the point of capturing the data to submitting to HMRC.”

Can small businesses get involved in the consultation process for MTD for Corporation Tax?

“The consultation kicked off several months ago, which will have included professional bodies and representatives from all business sectors who will be providing the voice of the tax payers in that process.”

You can find more information on the next phases of MTD and Sage Accounting solutions here.

This article was written as part of a paid for content campaign, in partnership with Sage.

The post Making Tax Digital: what comes next? appeared first on Small Business UK.

By April 2022, all businesses, regardless of income, will need to comply with Making Tax Digital (MTD) for VAT.

The legislation requires all business owners to maintain digital records and file periodic VAT returns through MTD-compliant software.

Provided you’re prepared, there’s nothing to worry about – in fact, it should be easier and fairer than ever for you to manage your VAT responsibilities.

We spoke to Becca Chappell, product manager, compliance, at Sage, to find out what small business owners need to do to get ready for MTD for VAT, and how accounting software can help.

What is MTD for VAT?

Chappell: “MTD for VAT is the new legislation from HMRC that affects how VAT registered businesses do their VAT accounting. When it was introduced in April 2019, it only applied to businesses that were above the VAT threshold of £85,000. But as of this year, all VAT registered businesses, regardless of turnover, will have to adhere to it.”

How should business owners prepare for it ahead of April 2022?

Chappell: “Firstly, you should review your working methods. If you use an accountant already, speak to them about your responsibilities; if you don’t, consider reaching out to one.

“If you’re already using software, check that it is MTD-enabled. If not you’ll need to find accounting software or bridging software that’s MTD-compliant.

Unsure whether your accounting software is suitable? You can find a full list of MTD-compliant software on Gov.uk.

Chappell: “You also need to make sure that your processes are in line with the MTD rules, such as keeping digital records. You should be keeping records anyway if you’re registered for VAT so the difference is you will need to keep these digitally. MTD for VAT is already running, so when you’re ready, you can sign up.

“There’s loads of guidance out there – read up, educate yourself and make sure you’re ready for it.”

What is the difference between accounting software and bridging software?

Chappell: “The difference is that your accounting software stores all your digital records for you, and acts as one place for you to submit your VAT return.

“Bridging software is primarily used as a connector to HMRC to submit your vat returns if you have either got non-MTD compliant software, or if you’re still using spreadsheets.

“You can continue to use spreadsheets if you so wish by using bridging software to submit your VAT return, but you still need to follow the MTD rules around digital links. This includes making sure you’re only using formulas and not copy and pasting information across. Bridging software is available, but it’s not ideal for MTD.”

A digital link occurs whenever VAT data is transferred between two digital paces for the purposes of submission to HMRC. It could be via contact between two software programmes, emailing a spreadsheet, or even using a memory stick. You can find a thorough explanation of the rules around digital links here.

What records do I need to keep and when is the deadline?

Chappell: “The deadline will be from the day of your first accounting period that falls on or after 1st April 2022.

“The records you’ll need to keep will be dependent on the VAT scheme that you’re in, which you should know from your preparation. The key things that will need to be kept digitally will include business name and address, VAT registration number, the VAT accounting scheme that you use, the VAT on goods and services that supply your business, and any sales invoices.”

How do I file an MTD for VAT return?

Chappell: “If you’re using accounting software, it should be fairly straightforward. Within your accounting software, there’ll usually be a function saying ‘Create a VAT return’ or ‘VAT report, which will produce your VAT return for you by using the figures from the information that you’ve entered.

“You just need to check the figures, and add any adjustments. Then just hit submit and it’ll go directly from your software to HMRC. After you’ve saved, you should get a summary of what you’ve submitted and any outstanding tasks you’ve still got to do.”

Can I use my phone for MTD for VAT?

Chappell: “To a degree, and it depends on the software. With Sage Cloud Accounting software, there’s an app you can use if you’re out and about to send invoices, which is fully MTD compliant.

“For example, if you’re a plumber and you’re out on a job, you can send an invoice by email. You can also get payment on the app and take pictures of your receipts when you’re out purchasing things. But you need to go online for the actual VAT return, because you should pay a bit more due diligence to that.”

What do I do with paper receipts/invoices?

Chappell: “All you need to do is take a picture and upload it into the app. If you’re still using spreadsheets, you need to keep those paper receipts, but if not, as long as you’ve got a copy and it includes the VAT registration number, time of supply, invoice number, and the rate of VAT on there, that’s fine. Your software should automatically keep it for the legally required amount of time.”

How can accounting software help with MTD for VAT?

Chappell: “If you adopt compliant software, you’ll be able to view all your tax information in one place, and you’ll get peace of mind that you’re up to date as legislation changes.

“As HMRC gets more feedback, it might change some parts of MTD for VAT and your software provider will take care of that for you. Just pressing a button to create a VAT return will save you so much time as well, and give you so much time back to spend on your business.”

Visit the Sage website for more information on Making Tax Digital and to learn more about accounting software.

This article was written as part of a paid for content campaign, in partnership with Sage.

*As Product Manager for Compliance Knowledge in Sage, Becca loves nothing more than digging deep into the detail of compliance changes in the UK & Ireland. With a background of Accountancy in both Practice and Industry she brings a dual perspective to any upcoming changes and shares her expertise with teams within Sage to ensure all of their products are compliant.

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What is Making Tax Digital?

Making Tax Digital (MTD) is a Government plan to shift paper-based tax reporting online, spelling the end of form-filling for millions of UK businesses. Changes affecting value added tax (VAT), income tax and corporation tax are being introduced over time, meaning a growing number of small firms are falling under MTD’s scope.

Businesses with turnovers higher than £85,000 are already required file quarterly VAT submissions digitally under MTD rules, records for which must be kept online and submitted via software.

Those with a turnover lower than the £85,000 threshold will have to comply by April 2022.

Next in line for digitisation is income tax: individuals with a self employed or property income over £10,000 per year must adopt digital filing from 6 April 2023, while corporation tax will shift online sometime after 2026 following a pilot period, according to the latest plans.

What businesses must do under MTD rules:

• Keep digital records
• Submit summary information to HMRC once a quarter
• File an end of period statement to make any adjustments and a final declaration by 31st January each year

Why is tax going digital?

How much do you enjoy doing self-assessment tax returns? Not much, I bet. MTD is designed to make the tax system clearer and more efficient for the UK’s 5.5m small businesses — as well as to help HM Revenue & Customs.

Once the basic information is stored digitally, you can access it whenever you need to, so you won’t have to spend each January looking through your business transactions, receipts and invoices for your Government Gateway code because it will be saved.

Under the new regime, a self-employed person must update their records once a quarter, instead of once a year. This is less time to lose all your receipts, which can’t be a bad thing, but it also helps to paint a clearer picture of your personal tax position.

5 steps for small businesses Making Tax Digital

#1 – Find out if your business qualifies

It’s been over two and a half years since HMRC went live with its Making Tax Digital (MTD) pilot. Since April 2019, UK businesses above the £85,000 VAT threshold have been tasked with processing their returns digitally.

From April 2022, business owners who charge VAT with a taxable turnover below £85,000 will also need to comply with Making Tax Digital. This phase of MTD for VAT will affect approximately 1.1m small businesses.

#2 – Know your VAT deadlines

It’s important that businesses do their research into the legislation and help get their leadership teams up to speed. There’s a lot of helpful information out there but it can be difficult to know where to start. That’s why HMRC has created its own MTD for VAT page, which provides useful insights to help businesses find out whether they apply, how they can sign up, and more.

Businesses should make diarised notes of the dates when VAT returns are due.

#3- Talk to your bookkeeper or accountant

They know the most about your business and will be able to advise you about what is best for it. They may also be able to give advice for example, on what software would be best for you.

#4 – Research which software package is right for you

So, which accounting software should you go for?

It largely depends on the type of business you run. Each business has to decide based on their personal circumstances. For SMEs specifically there are a number of different cloud software systems currently out there which are capable of recording transactions online.

>See also: 9 accounting software platforms for Making Tax Digital

#5 – Subscribe to HMRC updates

HMRC regularly sends out updates about the progress of MTD, which may affect you and your business. Make sure you keep up with these updates to ensure you don’t miss any important announcements.

What if I don’t want to use special accounting software?

For those not ready to take the leap to dedicated accounting software, Microsoft Excel spreadsheets coupled with bridging software, such as QuickBooks Online, can provide a simple, cost-effective and compliant way to submit VAT returns digitally to HMRC. Businesses can produce a “9-Box” VAT return within the Microsoft Excel spreadsheet and upload this to the bridging software, which connects to HMRC and submits the VAT digitally.

“This provides a straightforward and cost-effective solution to overcome the challenges the digital switch poses for them,” says MHA indirect tax partner Alison Horner.

Can I be exempt from Making Tax Digital?

Exemption from MTD is available but only if a business can show that it is not reasonable or practical to use computers, software, or the internet to comply with MTD rules. Most businesses will not qualify for an exemption though and will have to bite the bullet between now and April 1, warns MHA.

Further reading

A guide to Making Tax Digital for VAT

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Making Tax Digital (MTD) for VAT came into force in the UK on April 1 2019, but many businesses and accountants affected by the new rules are still trying to sort the fact from the fiction. Many are still unsure as to what they need to do to ensure that they are HMRC compliant, and crucially, what will happen if they fail to comply with the new rules.

MTD for VAT was the first major phase in the government’s overall initiative to make tax digital, which is designed to make it easier for businesses to keep on top of their day to day accounting. The legislation was intended to make tax administration more effective, efficient and easier for taxpayers by integrating digital record-keeping and enabling businesses to generate and send updates directly from their chosen accounting software to HMRC.

While the Government’s intention is to bring the days of foraging for receipts and painstakingly checking through spreadsheets or files for accuracy to an end, many small businesses were quite happy with the status quo, and are reluctant to embrace this move towards digital.

What is MTD for VAT?

In very simple terms, MTD for VAT requires VAT registered businesses with annual VAT-able sales of over £85,000 to keep their VAT records digitally and use MTD compatible software (software that is able to meet all the demands of the new MTD rules) to submit their VAT returns.

MTD for VAT April 2022 – what’s changing

It’s been over two and a half years since HMRC went live with its Making Tax Digital (MTD) for VAT pilot. Since April 2019, UK businesses above the £85,000 VAT threshold have been tasked with processing their returns digitally.

From April 2022, business owners who charge VAT with a taxable turnover below £85,000 will need to comply with Making Tax Digital. This phase of MTD for VAT will affect approximately 1.1m small businesses.

What this means for small business owners

Small business owners still submitting VAT via the HMRC portal or post will soon have to maintain records digitally and file VAT returns through approved software. Otherwise, they could be hit with unwanted fines – an unwelcome addition to the plethora of challenges already facing them.

Ahead of the April 2022 deadline, it’s crucial that impacted businesses begin their MTD for VAT preparations now. Even for non-VAT registered businesses and landlords, who have until April 2024 to become compliant with MTD for Income Tax (ITSA), it’s never too soon to put the right practices and infrastructure in place.

Current VAT penalties

Missing a VAT deadline triggers a 12-month period during which you may be required to pay a surcharge on top of your existing VAT bill if you continue to miss deadlines. The value of this surcharge will depend on how many times a VAT payment is missed.

Other VAT penalties that apply under MTD are:

• Sending a VAT return that contains a careless or deliberate inaccuracy can result in a penalty of​ up to 100 per cent ​of any tax under-stated or over-claimed
• Failing to alert HMRC within 30 days if you send a VAT assessment which is too low can result in a penalty of ​up to 30 per cent of the assessment
• Submitting a paper VAT return can result in a penalty of ​up to £400 unless HMRC has granted you an exemption from submitting an online return

How to get ready for Making Tax Digital

The following checklist can help guide small businesses towards MTD compliance:

#1 – Know your deadlines and what MTD means for you

It’s important that businesses do their research into the legislation and help get their leadership teams up to speed. There’s a lot of helpful information out there but it can be difficult to know where to start. That’s why HMRC has created its own MTD for VAT page, which provides useful insights to help businesses find out whether they apply, how they can sign up, and more.

If businesses pay their VAT in quarterly periods, their deadline for VAT is usually one month and seven days after the end of the VAT period, including the time for the payment to reach HMRC. However, those using the Annual Accounting Scheme will have different deadlines. For those who aren’t sure, HMRC has a free VAT payment deadline calculator, which is a tool to check when returns are due.

#2 – Speak to your accountant or bookkeeper

Given the number of challenges facing small businesses, it can be easy to place a new digital tax scheme at the bottom of the pile. April 2022 may seem like a long way off, but now is the perfect time to lean on your accountant or bookkeeper to help. They can advise you on how and when to digitise your paper-based system.

#3 – Research your software options

HMRC will ask for a number of digital records to be kept – from business name, adjustments to returns, rate of VAT charged on supplies made, and more. While businesses can use spreadsheets to calculate or summarise VAT transactions and work out what information they need to send to HMRC, they’ll need to use compatible software to actually send it.

Unless you have a legal exemption, HMRC will only accept VAT returns sent using approved MTD software. It’s a good idea to begin the search for a supplier early – this list will help narrow down the search. This software should seamlessly pull information from businesses’ digital records to submit returns, saving time that can be better spent running the business.

This shouldn’t be seen as a burden or simply an additional cost. Although mandatory for compliance, this software can help small businesses optimise processes, spark wider digitalisation and ultimately improve cash flow.

Although every organisation has its specific needs, businesses should ensure the software they choose ticks the following boxes:

1. Automatically calculates the tax you owe (including VAT and payroll tax)
2. Pulls transaction data straight from the bank, invoicing software, or POS system
3. Updates transactions every day, allowing firms to stay on top of bank reconciliations
4. Creates digital records of paper receipts by photographing them with an individual’s mobile

More on MTD for VAT

>See also: 9 accounting software platforms for Making Tax Digital

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