Getting Ready For Making Tax Digital
What is Making Tax Digital. Making Tax Digital (MTD) is part of a government strategy to make it easier for businesses and individuals to keep on top of their tax affairs. It is part of a 10 year strategy to build a trusted, modern tax administration system. From a HMRC perspective it will make it much easier for them to have oversight onto the tax affairs of individuals and businesses, reducing the tax gap. HMRC introduced phase one of the scheme in 2019 and since then it has been compulsory for VAT registered businesses since then who are also above the VAT threshold. This is being extended to all VAT registered businesses from 2022. There are future plans to widen the target audience of MTD to include income tax and later corporation tax. This will have a significant impact on UK landlords who may find themselves having to produce quarterly submissions to HMRC.
MTD for income tax is being brought in from April 2023. It will apply to income from self employment, partnerships and property. MTD for corporation tax is not expected before 2026. For a full read out of what to expect please read our previous article on what MTD means for landlords.
What we are doing about it. The main thing is that we are monitoring any information that is released on MTD to ensure that we are prepared when it is rolled out. We have also decided to make a number of changes to the products that we are offering going forward. The main decision is that we are not planning on offering a ‘bridging software’ solution that would enable us to link quarterly MTD submissions to HMRC through excel based systems. We have decided that MTD provides a good opportunity to fully embrace cloud based accounting solutions and that this offers the most efficient offering for our customers.
New Clients. From 9 August 2021 we will be issuing all new clients that we onboard with at the very minimum a Xero ledger* subscription as part of their fees. This will mean that their accounts are produced using cloud based MTD compliant software to enable straight forward transition to MTD. Our fees for new clients have been adjusted slightly to reflect this.
Existing Limited Company Customers. We are in the process of trialling Xero ledger* for limited companies. If successful the plan is to issue all existing limited company clients not currently utilising Xero will be issued with Xero ledger* subscription as part of their existing agreed fee structure. Customers will notice very little difference in the day to day but this will enable us to process your accounts more efficiently and will ensure that they are stored in the cloud utilising MTD compliant software.
Existing Sole Trader Customers. For tax year 2021 there will be no change, but we will look to discuss with you how MTD might impact you at our next meeting to discuss your tax affairs. For those not already using MTD compliant software we will look to transition you on a Xero ledger subscription for tax year 2022 onwards. This will make the data capture process for your tax returns more efficient and seamless and ensure your numbers are stored securely in the cloud on MTD compliant software. MTD is set to be rolled out for individuals from tax year 2024 (starting in April 2023). We will review closer to the time whether this is likely to impact you and if it is, whether you would prefer to adopt a self help approach where you submit quarterly returns yourself, supported by us, or whether you would like us to take this burden away from you and process on your behalf as part of our bookkeeping packages.
What Should You Do? In order to prepare yourself for integration with MTD compliant software where not done already you should ensure you have a separate bank account for each business. The Xero ledger* subscription we will mostly be using relies upon bank statements being uploaded which will be difficult to achieve if you have multiple businesses (or even worse personnel expenditure) in the same account.
We also recommend that you watch out for updates that we send out and as a minimum read this article to understand the potential impacts on your business. For existing customers we will look to discuss this with you in more detail at our next tax touchpoint and will ensure that you are kept up to date throughout the process.
What if I use a different MTD compliant software? For customers who operate with other MTD compliant cloud based accounting software that is fine you can continue to do so. We hope however to share with you some of the benefits of moving across to Xero.
*What is Xero Ledger? A simplified Xero subscription that strips out some of the useful but non essential features but still enables you to benefit from some of the main advantages such as cloud storage.
Accufy Accounting have a number of sole trader and limited company cloud based products that will enable you to prepare for MTD for income tax. If you would like to talk through this with someone then please get in touch.
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