Are you ready for Making Tax Digital (MTD)? Are you fully aware of what exactly MTD is? Does the very idea of dealing with the tax for your creative enterprise just feel daunting? Then you should read on.
MTD is going to transform the tough world of accounting we’re so used to – but for the better. And it’s likely going to impact you at some point in the future (if it hasn’t already).
Mike Parkes gives you the very best ways to prepare for it.
Know what’s happening with MTD
The status of MTD is not one that’s certain. Whilst MTD for VAT was rolled out in April 2019, there has been no confirmation on a start date for MTD for Business Tax yet. We do know that the earliest possible launch date is 2021, and that the tools are currently being piloted. You can keep up to date with what’s happening by following any updates on HMRC’s help and support page.
If you’re not quite aware of what MTD is, the basic premise is that your sole trader income and expenses will be sent to HMRC at the end of every quarter, in real-time, rather than the annual submission process we currently have. You will make each submission through HMRC-compatible tools. The government initiative has benefits for individual creative enterprises. HMRC believe it increases the chances of errors ensuring that the correct tax will be paid, as well as making it quicker and easier to submit your tax information. MTD should also reduce the information you need to submit to HMRC. Under the current Self Assessment regime if you also have a PAYE job you need to include this on your tax return. Under MTD you will not need to send information to HMRC that they already have.
There are specific exemptions from MTD for VAT, and it’s likely that those will also apply to MTD for business. There are quite a few different ways your business could be excluded from MTD, including that it’s impractical due to age, disability and/or living in a remote location.
VAT has exceptions in terms of annual turnover too – businesses below the current threshold (currently £85,000 as of 2019/20) are excluded. It’s already been confirmed that those that are unincorporated (like sole traders) will need to exceed £10,000 in income for MTD for business to be mandatory, although this is subject to confirmation from HMRC and the Government.
A points-based approach to penalties for MTD will also apply eventually – again, the soonest expectation date is 2021. Currently, late filing or non-compliance has been treated quite leniently as it’s the first year of MTD for VAT. However, HMRC will still penalise those with the default surcharge if a genuine effort is not made to pay VAT on time.
In a nutshell: MTD for VAT has been launched, with MTD for Business expected to follow. There are exemptions, along with penalties.
Sign up for a pilot
You can also prepare for MTD by getting familiar with the way it works. There is a pilot for MTD for Business currently running.
For this, you’d first need to have HMRC-compatible software. You’d then input your creative business’ income and expenses on a quarterly basis. Or, alternatively, you can use your current software to send automatic updates to HMRC if it can do so.
You’ll be able to trial how the tools can estimate the tax owed at any point of the year. Then, if you experience any issues, you can feed these back to HMRC. Not only will this enable you to get used to the software, but you’ll be able to carry out more accurate forecasting and act on anything that needs rectifying sooner.
There’s the option to pay your bill as you go too – which may prove advantageous if you find this helps ease budget management.
However, it’s worth noting that there are some circumstances that may stop you from taking part in the MTD for Income Tax pilot:
- Your creative business isn’t your only source of income
- You would report other income which are taxable or can have tax relief claimed on
- You operate via a limited company rather than as a sole trader
In a nutshell: There’s an MTD for Business pilot you can sign up to (depending on your situation) that requires MTD-compatible software to be in place
MTD for VAT
Those that are VAT-registered can sample the already tried-and-tested MTD for VAT tools, even if they don’t exceed the threshold. This is a particularly great idea if you want to see how MTD would work for Income Tax, but you don’t meet the criteria for the pilot. It’s also worth noting that from April 2020 any business that registers for VAT will have to report under the new MTD for VAT regime.
Currently, HMRC are allowing for the VAT return to be submitted via bridging software. This basically gives those who prefer spreadsheets the option to continue with their current processes. They just need to be able to digitally link with MTD-compatible software – HMRC has a list of those tools for both VAT and Income Tax.
About the author
Mike Parkes is the Technical Director of GoSimpleTax, a software that helps you to submit your Self Assessment and identifies where you can be making tax savings and saving money. He has over 30 years of experience in taxation, working for HMRC for a large portion of his career.
Last modified: 21st October 2019