Our Senior Tax Lecturer, Neil Da Costa, gives an overview of the new changes to the tax system - designed to make them more digital friendly.
HMRC has introduced the ‘Making Tax Digital’ Initiative in order to make it easier for individuals and businesses to get their tax right and keep on top of their affairs.
This follows HMRC’s introduction of personal tax accounts in 2015, which allow individuals to manage their personal tax online and now they plan on extending this initiative to other taxes.
Here is a breakdown of some of the main changes that will happen.
Making tax digital for VAT
Since 2019, VAT registered businesses with a turnover of more than £85,000 have been required to keep digital records and submit digital VAT returns. With regard to businesses who have a turnover of less than £85,000, they will have to use MTD from April 2022.
Businesses will have to maintain digital records which will include all the current VAT supporting documentation such as the business name and address, VAT number, time of supply or tax point and rate of VAT charged. In addition, businesses can claim back VAT on assets like machinery, computers and furniture so digital records of assets bought also need to be maintained.
When preparing the quarterly VAT returns, it is necessary to adjust for issues such as errors or mistakes discovered in previous returns etc. or reverse charge transactions relating to overseas supplies so digital records need to be maintained as well.
If the business is part of a special scheme such as the retail or flat rate schemes, then daily gross takings need to be maintained.
Software enabling MTD
HMRC does not provide the required software, so businesses will initially use spreadsheets to summarise the VAT transactions and calculate the amount payable. The business then needs ‘bridging software’ to convert the records into the correct submission format.
The bridging software from companies such as Xero, QuickBooks, Sage, Zoho and FreshBooks will then pull the information from the spreadsheets which will need to be preserved for at least six years.
The government estimated these costs to the small businesses at £70 a year for four years or £280 but the ICAEW estimated the cost at £1,250.
Making tax digital for sole traders
Self-employed individuals have to use MTD from April 2023 so will have to keep records digitally and submit income tax updates to HMRC. This will move self-employed tax to a real time system which lets you see how much income tax you owe as you go.
Once the digital records have been submitted for the entire year, the final report for the accounting period is computed and the sole trader can claim any capital allowances or loss relief.
Making tax digital for landlords
Landlords with rental income of more than £10,000 are also required to use MTD from April 2023 and will also have to keep records digitally and submit income tax updates to HMRC. This will also move landlords to a real time system which lets you see how much income tax you owe as you go.
MTD pilot scheme for sole traders and landlords
Sole traders and landlords have the option to join the digital returns pilot scheme now.
Since 2019, VAT registered businesses with a turnover of more than £85,000 have been required to keep digital records and submit digital VAT returns. With regard to businesses who have a turnover of less than £85,000, they will have to use MTD from April 2022.
Conclusion
This is a major shake up to the tax system and we will all have to be used to digital records. Eventually, paper records will not meet the legal requirements.
To find out more about our tax related courses please visit our tax qualification pages.
Neil Da Costa is a Senior Tax Lecturer with Kaplan in London. He is the author of Advanced Tax Condensed which summarises the entire syllabus using memory joggers.
He is also a passionate advocate for mental wellness and diversity.