Making Tax Digital: What does it mean for Businesses and Individuals?

Our last blog post provided an overview of the flagship Making Tax Digital scheme, which aims to place the majority of UK taxpayers onto a digital-only tax reporting platform. With less than a year now until VAT registered businesses will be required to file in this manner, we’ll be spending the next few months looking into the details of Making Tax Digital and any issues that could arise for both businesses and individuals.

If you own or run a business then it will almost certainly be mandatory for your business to file online when Making Tax Digital comes into force. As we mentioned above, businesses that are registered for VAT will be required to submit their tax return digitally as of April next year (our next blog post will look into the specifics of this), but following feedback from consultations with companies on the new scheme, the decision was made that unincorporated businesses with annual sales between £10,000 and the VAT threshold (currently £85,000) would be given an extra year to prepare, a timeline which could be further extended due to resources needed for Brexit. Making Tax Digital is thought to put too much financial pressure on businesses bringing in less than £10,000, which have been granted an exemption, but given the large majority of businesses will be affected, what changes can we expect to see?

First of all, Making Tax Digital signals the end of the tax return as we know it. Businesses will be expected to update their digital tax account throughout the year, rendering our current system of annual returns obsolete. This could provide the perfect opportunity for rethinking your accounting processes, largely as the requirement to update throughout the year means no more end of year rush, but also because Making Tax Digital could spell the end of the spreadsheet. In theory, businesses should be able to link a spreadsheet to their digital account, but in practice, swapping spreadsheets for the right accounting software for your business will help to streamline and simplify the process of online tax reporting. Another added benefit to the new scheme is that updating throughout the year will allow HMRC to provide you with ‘real time’ tax updates, so you should never receive a demand for backdated tax again. 

For individuals, Making Tax Digital presents an opportunity for a comprehensive overview of your tax information in one place, including anything you might owe, or be owed. Every individual will have a digital tax account, you may already use this and if not, you can register to access it. Your digital account allows you to perform simple admin such as change your address and contact details, check your tax code, national insurance payments and state pension record, manage any tax credits and child benefit you may receive and much more. As with businesses, once Making Tax Digital is in place an individual’s tax position will be assessed more regularly using data taken from employers and pension providers, which should allow for a more accurate accounting system and fewer under and overpayments. Some individuals, such as pensioners, will be moved onto a new ‘Simple Assessment’, whereas others could claim an exemption for religious, disability, age or location reasons and continue to file paper returns.

Despite the negativity surrounding Making Tax Digital, it could present an opportunity for clarity in our complex tax system. Preparation is key, which is what we’ll be looking at in future posts, and if you have any questions about getting your business ready for Making Tax Digital, just get in touch, we’d be happy to help!