Making Tax Digital (MTD) is set to bring about the biggest change to the UK’s tax system for a generation – so how will it impact the contracting world?
While many of the finer details of the initiative remain unclear, here are a few answers from our partners at accountancy software provider FreeAgent to the most common questions from contractors as the new era of digital tax comes closer to a reality.
What is Making Tax Digital?
MTD is the government’s plan to upgrade the UK’s tax system and make it fit for the digital age. This means that online tax submissions will become the norm and the annual tax return as we know it will become a thing of the past.
The biggest change will be the requirement to report your business’s financial information to HMRC at least four times a year. The press have been quick to label this process ‘quarterly tax returns’ but this is a little misleading. FreeAgent has produced a guide to clear up the confusion over ‘quarterly tax returns’ as well as a few other common misconceptions about the initiative.
When will MTD begin?
MTD is already underway! You may have noticed that you have access to a digital tax account with HMRC; this will be at the heart of MTD. Your digital tax account will be where you can track how much tax you owe as and when you submit your financial figures. Through your digital tax account you will soon be able to:
- see a complete picture of your business’s tax affairs
- manage all your tax liabilities in the same place, at the same time
- submit your financial information to HMRC in “as close to real time as possible”, preventing any overdue tax or repayments owed to you from building up
- have clarity about how much tax you owe, avoiding any surprise tax bills at the end of the year
A pilot scheme is also well under way, with tech companies such as FreeAgent working with HMRC to test how people will respond to digital record keeping.
MTD was taken out of the Finance Bill in April, prompting some people to believe that the initiative had been dropped. However, the timeline for implementation hasn’t been affected. In 2018 MTD will begin for businesses with annual sales over the VAT threshold of £85,000 (including a fair number of contractor companies), and in 2019 MTD will kick in for sole traders with annual sales between the minimum MTD threshold of £10,000 and the VAT threshold.
What about people who can’t use computers?
HMRC has already confirmed that charities and the “digitally excluded” and will be exempt from MTD. The digitally excluded are defined as those who cannot engage with digital accounting software for reasons of:
- remoteness of location
- “any other reason”
Unincorporated businesses and landlords with annual sales under £10,000 will also be exempt, though they can choose to take part in the initiative if they want to. The details of any further exemptions from MTD are still rather vague and it’s likely that HMRC will look to provide further guidance on these before the rollout in 2018.
What do I need to do to prepare for MTD?
If MTD applies to you, you’ll have to use digital tools to keep records of your income and costs. If you use spreadsheets to manage your accounts at the moment and don’t want to switch to accounting software, you’ll also have to make sure that they meet MTD’s technical requirements. This will most likely involve combining your spreadsheets with software in some way.
What are the benefits of digital record keeping?
Although MTD will bring about a big shift in the way many of the UK’s self-employed people manage their finances, there will also be a lot benefits, including:
- always knowing where you stand when it comes to tax
- having access to your company’s tax information online in a single place
- being able to plan and budget more effectively
You might also want to download FreeAgent’s free guide to Making Tax Digital to find out more about how the changes will impact you and your business.