What Small Businesses Need To Know About Making Tax Digital For Income

by | Sep 30, 2022

Some important changes are on the way for small businesses and we want to ensure you’re aware of them. The biggest change on the horizon affects how you manage your accounts and file your tax return or complete your self-assessment and it’s being called ‘Making Tax Digital.’

In 2019, the UK government set about making tax digital for VAT but now the HMRC are making tax digital for income. So, what does this mean for small businesses, landlords and the other self-employed?

Making tax digital means that the government will require you to submit accounting records produced electronically using approved software. This also means you will then be required to file quarterly summaries with HMRC and then an End Of Period Statement (EOPS) which will replace self-assessment.

So, if you have been relying on Excel, a banking app or your invoicing system, it may be time to consider changing how you manage your books. If you outsource your books to an accountant then they will probably be aware of these changes and are likely already using compliant software. However, you’ll need to discuss how this change will affect your accounting. Especially since you will need to be updating HMRC on a quarterly basis.

Who Will Making Tax Digital For Income Affect?

Making tax digital will affect:

  • The Self-employed
  • Landlords
  • Partnerships (non-incorporated)

However, you only need to be submitting your tax returns digitally if your gross income is over £10,000. This applies even if you have several income streams if the combined sum exceeds £10,000. If you are currently required to submit a self-assessment to HMRC, then the Making Tax Digital changes will apply to you when they come into effect.

When Will Tax Be Made Digital For Income Reporting?

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The making tax digital system rollout has been delayed, likely due to the 2020 pandemic. Currently, making tax digital is expected to be implemented in 2023, with April 2024 being the official start date.

However, many business owners are already digitalising their accounts and making changes to get ready for the move to making tax digital. If you outsource to an accountant, they are likely doing the same. Many people will already be using software that is approved for use in the scheme and so may find there is no big change in procedure.

The drive behind making tax digital is said to be to make it easier for business owners, landlords and sole traders to report their income and expenditure more easily. By moving to digital accounting, tax returns are likely to be more accurate and there will be less room for miscalculation and mistakes. Therefore, the HMRC and Gov.UK strongly advise making the move to digital accounting as soon as possible. Even though you don’t need to be compliant until probably 2024, new software can take some getting used to and you may even try several before finding your preferred system.

Currently, the following software has been approved for the making tax digital scheme:

However, there are a number of other software providers currently being assessed for approval. These include Intuit Quickbooks, Landlord Vision, Coconut and many more. Find the full list here.

What’s Good About Making Tax Digital?

The main benefit of the new making tax digital system is that you should be able to see your tax bill update through the year so you’ll know what you’re going to be expected to pay, at least approximately. The HMRC are also hoping going digital will increase accuracy.

Software providers are also busy making sure their systems are easy to use and do simplify the process. If the software is very easy to use you may even find you don’t need an accountant anymore. However, if you’re not tech-savvy you may find it goes the other way. Especially since you’ll need to be submitting quarterly returns. For this reason, some business owners are dreading the change. Another potential drawback is that although Gov.UK state there will be free-to-use software for making tax digital, it’s possible these won’t be so sophisticated which means you could end up paying software licensing fees too.

Voluntary Registration For Making Tax Digital

You don’t have to wait for the new system to be implemented to join and you may want to consider registering beforehand to give you time to get used to this new way of submitting returns.

You can sign up for making tax digital now and start reporting your earnings to HMRC this way. You’ll need to be registered for self-assessment and have your Government Gateway ID and login details, otherwise, you can set them up as you register.

Still confused? Not to worry, HMRC does have a tutorial video available explaining what you need to know about making tax digital.

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