A guide to Making Tax Digital
The way you file tax returns is set to change from 1 April 2019. Jonathan Bareham, Director and Co-founder of accountancy firm Raedan, explains everything you need to know about Making Tax Digital, the biggest update to taxation in a generation.
- What is 'Making Tax Digital'?
- How can businesses prepare for Making Tax Digital?
- What is tax and why do businesses have to pay it?
- What is a self-assessment tax return?
- Who needs to complete a tax return?
- How to do a tax return
- Reducing your bill and avoiding errors on tax returns
- What are the deadlines for completing your tax return?
- What are the benefits of hiring an accountant to help you complete your tax return?
- Tax made easier
What is 'Making Tax Digital'?
Making Tax Digital (MTD) is the UK Government's bid to make tax easier, more efficient and more effective.
From 1 April 2019, if your business is VAT-registered, with a turnover above the £85,000 threshold, you'll have to keep digital records and submit your VAT returns using compatible software.
Other taxes, such as corporation and income tax, are set to “go digital” in April 2020, at the earliest.
How can businesses prepare for Making Tax Digital?
If you're already using an accounting platform such as Xero, or something similar, you might not need to do much to prepare.
Many of the leading software providers have been preparing for MTD for some time, and HMRC has compiled a list of compatible software to save you the hassle of searching. For existing users, it should all be seamless and everything will be compliant and compatible from day one.
If you're currently using a spreadsheet to track your VAT obligations, you will need to digitally store your records and make sure they cannot be overwritten or deleted. What's more, you will still need to submit your return digitally, and this will require an extra piece of “bridging” software to make your data MTD compliant.
According to HMRC, bridging software will connect everything to HMRC's systems and allow them to send information to you digitally.
If the idea of using bridging software sounds complicated, it's a good idea to start researching software options now. The best time to switch accounting software is at the start of a new VAT period or accounting year, but you can do it at any time with a little help and organisation.
Make sure your data is up-to-date and accurate, otherwise things can get a little messy. Learn more about our small business insurance
What is tax and why do businesses have to pay it?
Tax is our compulsory contribution to state revenue. It is levied by the Government on employee's income and business profits, and is also added to the cost of certain goods, services and transactions.
We pay tax to fund public services such as health, welfare, transport, education and more. Central Government revenues come primarily from Income Tax, National Insurance contributions, VAT, Corporation Tax and fuel duty.
Income Tax is the largest source of revenue for the UK Government, representing around 30 percent of the total.
What is a self-assessment tax return?
A self-assessment return is a record of all the income or capital gains a taxpayer has made in the tax year from all sources worldwide.
HMRC is moving towards providing every taxpayer with an online digital account by 2020. In the meantime, most taxpayers can still opt to file a paper or an electronic return.
Who needs to complete a tax return?
Over 11.5 million people filed self-assessment tax returns in 2019. Completing and filing a return is not optional; HMRC applies strict rules for who should submit a return.
Generally, if someone only receives income taxed at source, such as a payslip, they do not have to file a self-assessment return.
However, you will be expected to file a return if you are:
- self-employed as a 'sole trader' and earned more than £1,000
- a partner in a business partnership
- paid more than £2,500 a year in untaxed income, such as from renting out property, savings or dividends
- making a profit from selling shares, land, a buy-to-let home, or other chargeable assets
- a company director, unless no pay or benefits were received
- claiming child benefit when one partner earns more than £50,000 a year
- receiving income from overseas that is taxable
- living overseas but receiving income from the UK
- earning more than £100,000 a year
- a trustee of trusts or registered pensions
If you fail to file, you will face penalties. If in doubt, check with HMRC because this list does not cover every possible scenario.
How to do a tax return
You can complete your own tax return or ask an accountant for help. If your financial affairs are straightforward, drafting and filing your own return online isn't too difficult.
Here are some tips to help you avoid some common pitfalls:
What should I have to hand?
Taxpayers need a wide range of security codes, forms, statements and other financial records readily available to complete a self-assessment tax return, depending on your personal circumstances.
If you're in business and VAT registered, then you're probably in a routine of bringing financial records up-to-date every quarter. If you're not VAT registered, then try to get into the same habit.
Using accounting software can help here. You can link to your bank data and automatically extract information from paper records to increase efficiency.
A good habit to develop is to have your online tax return completed by the end of November, so that you avoid any pressure in the run up to the deadline.
HMRC security codes and passwords
You cannot file online unless you have a unique tax reference (UTR) and you can only get one by registering with HMRC.
If you're completing a partnership return, you will need a separate UTR for the partnership as well as your own.
You will also require a username and password to access the HMRC online service. Setting up these UTRs and security codes can take up to a month, as the process is completed both online and by post.
The basics include:
- your national Insurance number
- date of birth
- forms P45 or P60 to show income received and tax paid
- dividend vouchers
- statements showing interest paid on savings
- details of pension contributions
If you're self-employed, you will need:
- bank statements
- till rolls
- receipts for expenditure
- mileage records
- any other documents showing income and expenses
Reducing your bill and avoiding errors on tax returns
To reduce your tax bill and avoid errors, make sure any allowances or reliefs you are entitled to are claimed in full, such as:
- Capital allowances if you're self-employed – this is spending on assets to run your business, such as tools, equipment, office furniture and vehicles.
- Charity donations – if you give money through Gift Aid or Payroll Giving you may qualify for tax relief.
- Pension contribution relief – higher rate and additional rate automatically collect 20% tax relief, but have to apply for a top-up to 40% or 45% by completing a self-assessment return.
Some common mistakes:
One of the most common errors when it comes to self-assessment is leaving everything to the last minute. In 2018, 758,707 people completed their return on the last day, and the most popular hour for submissions was between 4pm and 5pm on 31 January.
To avoid joining this very stressed group, keep records as you go throughout the year, rather than trying to tackle a heap of paperwork on the final day.
What are the deadlines for completing your tax return?
Filing deadlines for paper and online returns
Different filing dates and procedures apply depending on how you submit your tax return.
Taxpayers have to register for self-assessment by October 5 2019 to declare any income for the 2018-19 tax year, which runs from April 6 2018 until April 5 2019 inclusive.
Registration is a one-time task – once registered taxpayers stay on the HMRC database and receive reminders to file tax returns each year until such time as they notify HMRC of a change in circumstance.
Tax returns online
HMRC offers a free basic tax return service online, but if you have more complicated financial affairs you will need to buy software or download forms to complete your return.
The most common taxpayers who require software or extra forms are those with income as:
- Business partnerships
- Trusts and estates
- Lloyd's underwriters
- Religious ministers
Online tax returns for the tax year ending April 5 2019 have a filing deadline of midnight on January 31 2020. Any tax owed is paid at the same time.
Paper tax returns
If you are filing a paper self-assessment return for the tax year ending April 5 2019, the deadline is earlier for delivering the forms to HMRC – midnight on October 31 2019. Paper filers must pay any tax owed by January 31 2020.
Payments on account
Some taxpayers may have to make an extra payment in advance of the following year's income tax on January 31 and the following July 31. These payments are called “payment on account” and are credited against any tax due on January 31 2021.
Paying your self-assessment bill through your tax code
HMRC will collect any tax you owe by adjusting your personal tax coding providing:
- The tax bill is no more than £3,000
- You already pay income tax by PAYE, such as from a salary or pension
- A paper self-assessment return was filed by midnight on October 31 2019 or an online return was filed by midnight on December 31 2019
What are the benefits of hiring an accountant to help you complete your tax return?
There are a multitude of reasons why you should consider hiring an accountant. When it comes to helping you complete your tax return, here are the two big ones:
- They're tax experts - as a busy business owner, chances are you won't have the time nor the inclination to dig into the various ways you can reduce your tax bill. Accountants on the other hand are experts in tax, and can help you pinpoint savings and deductions throughout the year.
- They save you time - The time you spend rummaging through boxes and files and gathering receipts and bank statements is time better spent running your business. Delegating your tax return to a professional frees you from that responsibility, while giving you peace of mind that it's all in good hands.
Emma Jones, founder of Enterprise Nation, explores the reasons to hire an accountant for your small business here.
Tax made easier
The tax system can appear daunting but it's made easier by ensuring your records are correct. While MTD may seem a painful change at first, the idea behind storing digital records is the right one.
By adopting cloud software, you can prepare yourself for this change, and make tax filing easier, quicker and more accurate. Some might even say fun!
Still struggling to get your head around VAT? Clive Lewis, Head of Enterprise at ICAEW (Institute of Chartered Accountants in England and Wales), provides a back-to-basics guide.
You can learn more about our personalised insurance for small businesses here.