Guide to Making Tax Digital for small businesses

Whether you’re a large corporation or a small start-up, dealing with tax is part of doing business. The Government’s Making Tax Digital rollout is designed to ensure that all tax returns are submitted online. It’s aim is to simplify the process and to save HMRC billions of pounds lost to unpaid taxes and mistakes. It also saves small businesses hours of time going back and forth with paperwork.

So how do you move from paper to digital? What software can you use for submission? What do you need to know? And what are the benefits to the way you run your small business? Read on to find out more. 

In this guide:

• The basics of the Making Tax Digital initiative
• The benefits of moving tax returns online
• Using small business accounting software
• Key deadlines for compliance 
• Registering with HMRC for digital tax
• How to sign up

The UK Government wants the country to have one of the most digitally advanced tax administrations in the world and the Making Tax Digital initiative is a key part of this policy. As well as making it easier for the self-employed and businesses to file their tax returns online, the long-term aim is to do away with the annual paper tax return entirely. 

Launched in 2019, Making Tax Digital is designed to be more efficient, and help individuals and businesses to keep on top of their tax affairs with the aid of small business accounting software. 

For sole traders and small businesses this throws up two issues: 

1. As a small business or sole trader you will soon be required to submit your tax returns every quarter, rather than annually, meaning you need to keep track of your taxes on a regular basis. 

2. Instead of using spreadsheets or paper records, it will be compulsory to keep digital tax records. 

Over the next two years, there are further changes businesses and individuals will need to comply with. Currently, the rules only apply to VAT-registered businesses but eventually all businesses will be subject to the same digital rules. 

The advantage of the new system is that users will get real-time data on taxes, meaning tax liability is transparent and it’s easier to pay the right amount of tax. It is hoped that the system will reduce errors, increase accuracy and by filing quarterly instead of once a year, get rid of the annual stress of filing a tax return.

For time-pressed business owners, it will also save on admin. And if using online accounting software (see below), they can save costs on bookkeeping and accountancy services too. Not only that, tax details will be viewable on a mobile phone — a big plus for entrepreneurs on the go.

In addition, making your tax digital is a sure-fire way to future proof your business. Digital tax is now a global revolution, so you may as well hop on board. 

As part of the new initiative, businesses will be expected to submit their tax returns via accounting software. It will not be provided — businesses must pick up the tab or find a free version — and the software must be HMRC-approved and be compatible with their Application Programming Interface (API). A list of currently approved software applications can be found here. Countingup is also available and uses inbuilt tax filing software to simplify digital record-keeping and view tax estimates all year round so you know what to put aside. It also makes it much easier to manage everything in one place.

Moving to digital tax is mandatory so you should make sure your business is ready to meet these deadlines. Miss them and you could face penalties. 

• Digital VAT returns have already come into force for businesses turning over more than £85,000 and registered for VAT. 

• From April 2022, all VAT-registered businesses regardless of turnover, will have to file digital returns.
  
• From April 2023, anyone who is a self-assessment taxpayer (sole traders and landlords) must comply with Making Tax Digital rules on income tax. Anyone earning more than £10,000 a year from their business or property will have to do this.

• Eventually all businesses, including limited companies, will be subject to making tax digital regulations, but the changes are being introduced gradually. There is talk of corporation tax being digitised but no date is set yet.

Businesses with a turnover above the VAT threshold of £85,000 should already be registered, keep digital records and file digital VAT returns. 

While it’s not yet compulsory for businesses under this threshold to sign up for making tax digital, HMRC is encouraging business owners to come on board voluntarily so they can familiarise themselves with the processes. If you’re starting your own business, registering early could get you used to the systems before they become compulsory.

The same applies for the self-employed — although it won’t be compulsory until April 2023, sole traders are being encouraged to voluntarily sign up for a pilot digital tax returns scheme. Rather than filing an annual self-assessment, users will keep digital records and send income tax updates to HMRC, letting the Government know how much tax is owed as they go. At the end of each tax year, they’ll send a final report and tax will be calculated.

The Government has made it easy to sign up for Making Tax Digital and you can start the process here. You’ll need a Government Gateway user ID and password, business email address, VAT number and your latest VAT return.

If you’re a sole trader, you’ll need your National Insurance number. If you run a limited company, you need your company registration number and unique taxpayer reference.

Embracing Making Tax Digital is the next stage in tax evolution in the UK. Getting to grips with it now will allow you to keep a much closer eye on your tax liabilities and save you valuable time later on.

Countingup is the business current account with inbuilt tax filing and accounting software that can streamline your financial admin and ensure that filing your tax digitally is straightforward. Find out more here