Know What Is The Process Of Making Tax Digital In The UK
Recently making tax digital (MTD) has been showing up in the news, and it has been found that some major changes have been brought to the UK tax system. For that we need to understand the meaning of MTD, its purpose and benefits, and how this change will affect the status quo. You can also refer to the making tax digital guide to deeply understand the system.
What Is Making Tax Digital?
MTD has been introduced to reform the UK tax system as a government initiative, which will ease the tax reporting for businesses in the UK. The new tax system starts from April 1, 2022, after which all the VAT registered businesses have to maintain their tax records digitally, updating and storing their data at one place automatically. Such a system has been introduced for increasing the transparency and eliminating the errors associated with the manual tax filing system.
With this initiative, all the businesses in the UK can have easy access to digital tax accounting. Also, from this point of time HMRC will collect the tax information on a quarterly basis from the businesses, making it a huge step towards creating the most efficient and technologically advanced tax administration system in the world. This way HMRC is marking the end of the annual tax filing system.
How the MTD Process Will Change The Tax System In The UK?
MTD tax structure is aimed at restructuring the entire tax system for businesses in the UK, which means businesses need to follow a certain set of standards of maintaining record practices and help in filing quarterly returns. All such preparations are beginning, and the businesses have already moved online which increases the accuracy and efficiency of the tax system.
● Recording Digitally
All the businesses and individuals filing with HMRC should use digital tools for submitting their tax information instead of record keeping in the paper format. If you fail to understand the digital records it may result in interest charges and penalties. Before this, the use of spreadsheets was done for digital record keeping, which was not approved with the tax authorities. Moreover, the latest announcement made in this regard has allowed for using the system if it is integrated with the accounting platform which allows for digitally updating to HMRC.
● Quarterly Data
The starting of Making Tax Digital doesn’t mean that paper accounting has ended, as this marks the end of annual returns filing in the UK. With the MTD system, you cannot file the annual returns at the end of the year as it has a quarterly basis system. For this you need to update the HMRC system every three months, and it may require you to spend more time on the bookkeeping system.
How is MTD Implemented?
The timeline for MTD implemented is published through HMRC:
- Pilot testing begins in April 2018.
- Businesses having a VAT threshold of £85,000 turnover are required to keep the digital records.
- From April 2020, HMRC increased the scope of MTD including sole traders and partners having income between £10k and £83k.
- From April 2022, all the VAT registered businesses having threshold below the VAT limit will abide by the MTD rules for their first return.
- From April 2024, the self-employed businesses with property or business income above £10,000 which need to follow the MTD income tax rules for their accounting period starting from April 2024.
The traditional tax system has lots of disadvantages even for the government authorities to handle tax administration. Businesses have started to switch to the new making tax digital MTD system by the HMRC, which has digitised the complete tax structure. The process of Making Tax Digital works well with the UK businesses as it needs to be business friendly for the system to work smoothly.