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Columnist Shishir Khadka, founder and CEO of Boost Accounting, is an author, international speaker, and financial transformational coach. Shishir helps entrepreneurs build financial confidence and successful financial stories, transforming client businesses from £150k to £38.5m.
Read all of Shishir’s articles here.

6th April 2019 was a significant date for small business owners. It marked the start of a new era as tax became digital for VAT purposes. Making Tax Digital has been known for a long time, but there are still plenty of small business owners who don’t understand what this means for them and how does it work.

Consequently, we’ve constructed a comprehensive guide to making tax digital, which will explain everything you need to know about this. It’s essential reading for all small business owners, and you’ll learn exactly what you need to know about making tax digital. If you still haven’t taken action, then this guide will help you to do that.

Making Tax Digital – what does it mean?

Making Tax Digital – often abbreviated to just MTD – is a government initiative that’s designed to make life easier for small businesses that file their taxes. The simple definition is that HMRC wants to make tax submission and management a wholly digital entity. This means no more paper tax returns or records; everything is done online.

Why has HMRC introduced Making Tax Digital?

This movement is all part of the government’s aim to make HMRC the world’s biggest digital tax administration. But, this isn’t the sole reason for the introduction of Making Tax Digital. As per the government website, there are three clear reasons for making this drastic change to the tax system.

Primarily, they want to make the whole tax administration process a lot more effective, efficient, and easier for people to use. Under the current system, it’s found that many small business owners and entrepreneurs struggle to get their tax right at the first attempt. This is often attributed to a lack of organization, which is down to physical tax records that can often be lost or forgotten about.

As such, small businesses run the risk of either under or overpaid tax, which results in various difficulties down the line. With Making Tax Digital, the use of digital records will help everyone improve the accuracy of their tax submissions. This is also combined with specific software that’s designed to simplify the whole process and make it easier to send information directly to HMRC securely. So, this cuts out any transportation errors, leading to a reduction in lost tax.

You can also add in the fact that the world around us is becoming more and more digitally dependent. So, this move from HMRC will bring tax into the 21st Century and make it easier for everyone to manage. The underlying aim is that it will help small business owners and entrepreneurs, while also benefitting the government by cutting down on all the lost tax.

Who is affected, and when did it come into effect?

Currently, the only businesses that will be affected by Making Tax Digital are business owners that have a VAT-registered company with a taxable turnover above the VAT threshold. This threshold currently sits at £85,000.

If you fall into this category, then you would have seen MTD come into effect on April 2019. As a result, you would have started keeping digital records, and filed VAT return through MTD enabled software. If you’ve been granted a deferral, then you have until October 2019 instead.

For everyone else, Making Tax Digital isn’t something to worry about until April 2020 at the earliest.

How does Making Tax Digital work?

Understandably, this is the question most of the small business owners are still not familiar with. We now know that MTD means tax management and administration is turning into a digital-only entity, but how will this work?

Well, HMRC has outlined a few very specific changes to the way you will manage your yearly tax for VAT. Primarily, you must keep all of your records in a digital form, and you need to file your VAT returns through software that’s MTD-enabled. 

But, you also need to file your tax information every quarter. This isn’t something you currently need to do, with many people ignoring their taxes until the last possible minute – admit it, we all do this! HMRC believes that this is what creates a lot of inaccurate tax results because people miss out on vital tax information in their scramble to meet deadlines.

Don’t worry; this doesn’t mean you have to file numerous tax returns; it just means you have to keep updating your tax records quarterly. The aim is to keep your information accurate, meaning HMRC can check things at intervals throughout the year. Then, when it comes to paying your VAT tax, you have everything ready for you to use, resulting in the correct amount of tax being paid.

Which software should be used for Making Tax Digital?

To make tax digital, businesses need to use the software. If you look online, you’ll find a plethora of accounting and tax software out there, but which ones should you use?

HMRC makes the criteria simple; you need to choose software that allows you to submit VAT returns and keep records of your purchases and sales. The good news is that a lot of popular software – like Sage, Quickbooks, and Xero – are all compatible with MTD. They can be linked to your digital tax account, allowing a bridge between your software and the digital tax system.

The best thing to do is to check with the software suppliers to ensure that they have MTD-enabled software for you to use. If you’re currently using something to help you file your tax returns, then contact customer support to find out. Hopefully, you won’t need to change anything, and you can still use the same software. If not, you need to go and find MTD-enabled software that allows you to submit VAT returns and store purchases/sales records.

Making Tax Digital: a summary

 To summarise, MTD is different from just submitting an online tax return. From April 2019, VAT-registered businesses that earn above the taxable threshold started to implement MTD. You’ll have to keep all of your tax information online, update it quarterly, and submit data via a software package.

It’s all designed to make tax easier and more efficient, which should help you get it right at the first attempt.

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