Making Tax Digital: what is it, and do contractors need to worry?
Making Tax Digital (MTD) was laid out back in December 2018, with the Government setting out a roadmap of changes to the UK’s tax compliance system. The Government says the reasons for this are to make the tax system more effective, more efficient, and to make it easier for taxpayers to get their taxes right.
One aspect of the scheme has already been introduced, with further changes due to come in over the next few years. We’ve put together an overview of the changes that are happening, how they will affect contractors and the self-employed, and some common questions from around the internet.
This article is for information purposes only you should always consult with your accountant for any tax queries.
What is Making Tax Digital?
Making Tax Digital is HMRC’s plan to transition the tax records for small businesses and the self-employed to being submitted online, with the eventual plan that they will become completely paperless. Once the changeover period is over, paper records will no longer be acceptable for VAT and income tax returns. Instead, businesses will have to submit their tax details and make payments throughout the year online, instead of having to do one self-assessment deadline annually. The changes are being introduced gradually, with the first part being introduced back in April 2019.
What are the eligibility criteria for Making Tax Digital?
The current criteria are that all VAT registered businesses with a taxable turnover of more than £85,000 are required to submit their details online for VAT. This came into effect on 1st April 2019 (with some ‘more complex’ businesses slightly later, with effect October 2019).
If you are exempt from the current rules, you can still apply to file your VAT return form digitally if you would like to do so. In order to apply, you’ll need to pull together some information including your National Insurance number and your Government Gateway user ID and password. It’s also worth noting that to be able to sign up and submit your VAT forms digitally throughout the year, you would need to use a compatible software that has the scope to do this.
When are the new digital tax updates coming in?
The key dates contractors need to be aware of are:
- From 1st April 2022, all VAT registered businesses must use making tax digital for VAT, whatever they earn.
- From 6th April 2023, self-employed businesses (and landlords) with income greater than £10,000 will also need to follow the Making Tax Digital rules for Income Tax.
What digital records are required for VAT purposes?
A full list of what records must be kept can be viewed here, but the core records you must keep include:
- Copies of invoices you issue;
- All invoices you receive;
- Debit or credit notes;
- Self-billing agreements;
- The name, address and VAT number of any self-billing supplies debit or credit notes.
How do I submit my income tax and VAT records?
When it comes into effect, there are two options to go about submitting your tax and VAT records to HMRC. The first way is via a compatible software package, which will store all of your digital records and can be submitted directly to HMRC. The software would need to have the capacity to keep and maintain the records, prepare your VAT returns using this information and then communicate with HMRC digitally through their Application Programming Interface. HMRC has a list of compatible software here.
The second option is to use bridging software, which will connect non-compatible software (i.e. if you already have the information in spreadsheets) to HMRC systems.
How can contractors prepare for Making Tax Digital?
The good news if you haven’t already been required to use the system, you’ve got two years until the changes come into effect. You could contact your accountant to check when you need to make the changeover.
Kingsbridge may not be able to help with your taxes, but one thing we can help you with is business insurance. Our competitively packaged policy has everything you need, including Professional Indemnity cover and Public Liability insurance. You can also set the limits that you require. Give our friendly team a call today on 01242 808 740.