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Updated: 14 November 2022
Though HMRC launched its Making Tax Digital (MTD) initiative back in April 2019, the second phase has only recently launched. As of 1st November 2022, VAT-registered businesses are no longer able to use their existing VAT account to send returns, and must be signed up to MTD. To help you comply with the new initiative, we’ve provided a brief rundown of what you need to know about the digital tax initiative, the key dates and the best software to use.
Making Tax Digital (or MTD) is an HMRC initiative to get small businesses and the self-employed to complete tax records and VAT returns digitally. It aims to streamline the process and cut down on waste by making the system completely paperless.
The first phase for the initiative, MTD for VAT, began on 1st April 2019. This affected all VAT-registered businesses that had a taxable turnover above the VAT threshold of £85,000.
From 1st April 2022, MTD became available for all VAT-registered businesses. Due to businesses filing VAT returns at different times depending on their accounting period, many businesses were continuing to use paper records during the crossover period.
As of 1st November 2022 however, all VAT-registered businesses are required to use MTD-compatible software and keep their records with a MTD account. Businesses are no longer able to file paper returns or use their old VAT online account.
The deadline for self assessment taxpayers to comply with MTD for income tax returns is April 2024. This was initially scheduled for April 2023, however was pushed back to allow businesses more time to prepare following the pandemic.
It will apply to taxpayers who file income tax self assessments for business or property income of more than £10,000 a year.
At present, it’s only VAT-registered businesses that need to comply with the new initiative, however eventually it will be rolled out to all businesses. How you register for digital tax depends entirely on which phase you’re part of.
All VAT-registered businesses have to keep digital records and send digital VAT returns.
You’ll want to use compatible accounting software to submit your returns, which will then pull the correct information from your digital records. This information will then need to be preserved for up to six years.
Once you’ve done this, you can sign up to Making Tax Digital using the Government’s tax service.
MTD for income tax won’t launch fully until April 2024. While it’s not currently compulsory to join the scheme, if you fill in a self assessment tax return, you may be able to sign up for MTD for income tax early. Through it, you can send income tax updates to HMRC digitally, without the need to fill out a self assessment tax return, and you can get used to the new system ahead of the deadline.
The initiative strives to create a real-time system, where you can see how much income tax you owe as you earn. As with MTD for VAT, you can use compatible accounting software to keep records and send income and expenses summaries to HMRC every three months. You’ll also be able to view estimates of how much tax you’ll owe. At the end of the accounting year, you send a final report and your tax for the year will then be calculated. You’ll then be able to claim any allowances or reliefs.
This system will replace the current self assessment tax return with an end of period statement and final declaration.
Since so much of MTD is dependent on having compatible accounting software, we’ve taken a look at some of the best software, as well as the cost, to help you find the right fit for your needs.
Sage Business Cloud Accounting — on-the-go accounting for an all-round solution
A returning mention from our best apps for small businesses in 2020 roundup, Sage’s Accounting software is one of the best in the business, with comprehensive features to help you handle every aspect of your finance. It’s ideal for businesses looking for a straightforward solution, as it simplifies your sales tracking and reporting, but it can also accept and receive payments, create and send invoices and help you stay on top of bookkeeping. An additional benefit is that the entire system is cloud-based, so regardless of whether you log in from a phone, tablet or computer, you’ll always have access to the same powerful features.
Its plans start from £12 + VAT per month for the Accounting Start package, which offers access for one user, but you’ll also get a 3 month free trial before you have to start paying. The Accounting Standard package costs just £26 + VAT per month, but also offers extra features, such as advanced reports, forecasting cash flow and managing purchase invoices, as well as logins for as many users as you’d like. This makes it a worthy trade up if you want to get the most out of what the platform can offer.
Xero — cost-effective, cloud-based accounting
Designed to be used directly from web browsers, Xero’s cloud-based platform is an excellent choice for mid to large-sized businesses. Its innovative dashboard allows you to track your accounts with ease, and it supports sales, purchases, bills, expenses, inventory and payroll, all from one platform. Some of its latest additions include enhanced expense and project management, mobile bill-tracking, integration with HubDoc, improved navigation and a partnership with payroll tool, Gusto.
Starter plans begin at £14 a month, although these have limits on the number of invoices and bills you can send and submit. For a more all-round solution without limits, consider the Standard plan, which comes in at £28 per month.
QuickBooks — powerful reporting tools & profitability management
QuickBooks is well-known in the accounting solutions sector for its wide range of features and accessible platform. Available as both a cloud-based web browser application and as a standalone desktop application, the platform offers packages tailored to your needs. For example, the Simple Start package will allow you to track income and expenses, capture and organise receipts, invoice and accept payments, run general reports, send estimates, track sales and sales tax, as well as manage up to 1099 contractors.
For a more comprehensive package, you could get Essentials, which adds the ability to manage bills, track time efficiently and gives three users access to the platform, while the Plus package expands this to five users, and also lets you track profitability and inventory too.
The Simple Start plan will set you back £12 per month, while the Essentials and Plus plans will cost you £22 per month and £32 per month respectively.
Wave —designed for freelancers
While all the other compatible software we’ve discussed so far has been on monthly plans, we thought it was worth including some of the powerful free tools there are available too. One such platform is Wave, a pay-per-payment software designed specifically for the freelance market. Manage invoices, accounts and receipts all through the platform for free, and only pay for any payments taken through Wave (although payments seem to only be in USD at the moment).
While the costs of taking payments through Wave can rack up pretty quickly, it’s a great contender if you plan to use it only for its accounting features. You get unlimited income and expense tracking, powerful reporting features, and unlimited receipt scanning with the mobile app, to name just some of what it has on offer. While Wave doesn’t directly connect to HMRC to submit your VAT100, you can export its data to bridging software, like a spreadsheet, which you can then upload to MTD to ensure you’re compliant.
QuickFile — smart & simple accounting
To round things off, we have another free accounting platform, QuickFile. It may not be bursting with as many features as Wave, but the platform does offer professional invoicing, receipt management, banking automation and more. However, its feature for generating MTD VAT Returns is only available if you join their Large or Extra Large business plans, which come in at a relatively inexpensive £60 + VAT per year. However, you’ll also get an expanded array of features for that price, including advanced customisation and segmented profit and loss reports. While it’s not as strong as some of the other options in this list, a fixed £60 + VAT per year isn’t a bad price for the features you’ll have access to in this platform.
14/11/22: While we want to help as much as we can, the information found here is provided solely for informational purposes and should not be considered financial or legal advice. To the extent permitted by law, Funding Circle does not accept any liability for any loss or damage which may arise directly or indirectly from the use of, or reliance on, the information contained here. If you have any questions, please speak to your professional adviser or seek independent legal advice.
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