Tax rules are changing, and it’s important to know how. If you are a business owner or self-employed, you need to understand Making Tax Digital (MTD). This new system is designed to make tax filing easier and more accurate. In this blog, we will explain what Making Tax Digital is, how it impacts you, and what you need to do to stay on track.
By the end, you will understand how MTD works and what steps to take to follow the rules.
What is Making Tax digital?
Making Tax Digital (MTD) is a UK government project to update the tax system. The idea is to replace paper-based records with digital systems. This will help make tax filing faster, easier, and more accurate.
MTD started with VAT-registered businesses. The government plans to include more taxes, like Income Tax for self-employed people, in the future. Eventually, all businesses and individuals will need to use MTD to file taxes.
How Does Making Tax Digital Work?
With Making Tax Digital, you must use special software to keep your income and expense records. You cannot just use paper or spreadsheets. The software will send the tax information directly to HM Revenue & Customs (HMRC).
If you are VAT-registered, you will need to submit your VAT returns every quarter. The software will automatically send the data to HMRC. If you’re self-employed, MTD for Income Tax will also require you to send updates every three months.
To follow MTD rules, you need to:
Use software toware to track your records.
Send your VAT or income details digitally.
Submit your tax returns directly to HMRC.
The goal is to make tax filing easier and more accurate for everyone.
Who Needs to Follow Making Tax Digital?
1. VAT-Registered Businesses
If your business is registered for VAT and has a turnover of more than £85000, you must follow Making Tax Digital. This means using MTD-approved software to keep records and submit VAT returns.
This rule applies to most VAT-registered businesses, whether you’re a sole trader, a partnership, or a limited company.
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Self-Employed People
If you are self-employed and earn over £10,000 a year, Making Tax Digital rules will apply to you. You need to use MTD-compliant software to track your income and expenses and send updates to HMRC evevery quarter.
In the past, you only had to file once a year. MTD requires more regular updates, making it easier for HMRC to keep track of your taxes.
3. Landlord’s Earnings Over £10000
If you earn more than £10,000 a year from renting property, you will also need to follow Making Tax Digital rules. You’ll need to submit updates on your rental income and expenses every quarter using MTD-approved software.
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Businesses Under £85,000 in VAT
If your business has a VAT taxable turn over below £85000, you don’t have to follow Making Tax Digital right now. However, smaller businesses might need to follow MTD rules in the future.
5. Voluntary Participation
Even if your business is not required tollow MTD, you can choose to do so. If you want to make your tax filing easier, you can start using MTD-compliant software voluntarily.
Benefits of Making Tax Digital
1. More Accurate Tax Returns
One big benefit of Making Tax Digital is that it reduces mistakes. With the software automatically tracking your records, the chance of making an error is much lower. This means fewer fines from HMRC.
2. Easier Tax Management
MTD makes managing your taxes simpler. You no longer need to track everything on paper. The software keeps all your income and expenses in one place. It also sends the information directly to HMRC, making the whole process faster.
3. Real-Time Updates
With MTD, you send updates to HMRC more often. Instead of filing at the end of the year, you will submit quarterly updates. This keeps everything up to date and allows HMRC to have the latest information about your finances.
4. Less Paperwork
Since everything is digital, Making Tax Digital cuts down on paperwork. You don’n’tneed to keep paper receipts or records. The software tracks your financial data for you, making it easier to stay organized.
5. Better Understanding of Your Finances
MTD-compliant software often includes extra features, like reports on your business’s profit and loss. These tools can help ou betterer understand your finances and make smart decisions for your business.
How Does Making Tax Digital Affect Your Business?
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New Record-Keeping Rules
Under Making Tax Digital, you must keep your business records digitally. This means you need to use MTD-approved software. You can no longer use paper records or simple sprespreadsheets.
Software like QuickBooks, Sage, and Xero are all approved for MTD. These tools allow you to enter your income and expensesand send the data directly to HMRC.
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Quarterly Updates
With Making Tax Digital, you will need to submit updates to HMRC every quarter. This is a change from the old system where you filed taxes once a year. The goal of quarterly updates is to give HMRC real-time information about your business.
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Meeting Deadlines
With Making Tax Digital, it is more important than ever to meet deadlines. If you miss a deadline, you may face fines from HMRC Submitting your updates quarterly will help you stay on track.
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Cost of Software
MTD-compliant software does come with a cost. Some softwarthe opoptions are free, while others charge a monthly or annual fee. The price depends on the features you need. Look for software that fits your business needs and budget.
What Do You Need to Do to Follow Making Tax Digital?
1. Get MTD-Compliant Software
The first step to following Making Tax Digital is getting software that meets HMRC’s requirements. This software will help you track your income and expenses and submit your tax details to HMRC.
Software like QuickBooks, Xero, and Sage are all good choices. Pick the one that best suits your business and budget.
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Keep Digital Records
Once you have the right software, make sure to keep accurate digital records. Regularly enter your income and expenses into the software to keep your rrecords up to date.
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Submit Your Updates Quarterly
Under Making Tax Digital, you will need to submit updates every quarter. Set reminders to make sure you submit your updates on time.
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Stay Informed on Changes
The rules around Making Tax Digital may change over time. Make sure you stay informed about any new rules or requirements. You can do this by checking HMRC’s website or following your software provider for updates.
Conclusion
Making Tax Digital is changing how taxes are filed. With MTD, you will use software to keep digital records and send updates to HMRC regularly. This will make filing your taxes easier and more accurate.
By understanding Making Tax Digital and using the right software, you can ensure your business stays compliant and avoid penalties. The new system may seem complicated at first, but it will make managing your taxes more straight forward in the long run. Start using MTD-compliant software today and take control of your taxes!
FAQs About Making Tax Digital
1. Do I need to follow MTD if I’m self-employed?
Yes, if you earn over £10,000 a year, you need to follow Making Tax Digital rules. You will need to use MTD-compliant software to submit your income and expenses every quarter.
2. What software can I use for MTD?
You can use software like QuickBooks, Xero, or Sage to comply with Making Tax Digital. Make sure the software is approved by HMRC.
3. Is MTD mandatory for all businesses?
Currently, Making Tax Digital is mandatory for VAT-registered businesses with a turnover over £85000 and for self-employed individuals. The rules may apply to more businesses in the future.
4. How do I report my taxes under MTD?
Under Making Tax Digital, you will report your income and expenses evevery quarter using MTD-compliant software. The software will send the information directly to HMRC.
5. Will MTD save me money?
While you might have to pay for software, Making Tax Digital can save you money in the long run by reducing mistakes and fines. It will also help you keep track of your finances more easily.