As a UK contractor, it’s essential to stay updated with changes in the tax system that may affect your business. One of the most significant changes in recent years is the introduction of Making Tax Digital. Making Tax Digital is a British government program that aims to make the tax system more efficient and effective by requiring businesses to keep digital records and submit tax returns online.
If you are a UK contractor, it’s important to understand what MTD is, how it affects you, and what steps you need to take to ensure you comply with the new requirements.
What is Making Tax Digital?
Making Tax Digital is a UK government program that aims to modernize the tax system by requiring businesses to keep digital records and submit tax returns online. Under MTD, businesses are required to keep digital records of their income and expenses using compatible software. They must then use this digital data to submit their tax returns online to HM Revenue & Customs (HMRC).
MTD was introduced in stages, with the first phase affecting VAT-registered businesses with a turnover above the VAT threshold (£85,000). From April 2023, MTD will be extended to all VAT-registered businesses, regardless of turnover. From April 2024, MTD will be extended further to include income and corporation tax.
How Does MTD Affect Contractors?
If you are a VAT-registered contractor, you must comply with the MTD requirements from the relevant deadline. Using compatible software, you must keep digital records of your income and expenses and submit your VAT returns online through the HMRC’s MTD portal.
If you are not yet VAT-registered but expect to exceed the VAT threshold in the future, consider whether you need to start preparing for MTD now. Even if you still need to comply with the MTD requirements, it’s a good idea to start using digital accounting software and keeping digital records to be ready when the time comes.
How Can You Prepare for Making Tax Digital?
To comply with the MTD requirements, you must use compatible accounting software. This is to keep digital records of your income and expenses. Many different software packages are available. These range from basic spreadsheets to more advanced cloud-based accounting systems. Choosing a software package that is suitable for your business and that you are comfortable using is important.
In addition to choosing the right accounting software, you will also need to ensure that you are familiar with the MTD requirements and have a plan to comply with them. This may include training staff on how to use the accounting software, setting up processes to ensure that all deals are recorded accurately, and ensuring you have a reliable internet connection to submit your tax returns online.
Making Tax Digital vat is a significant change to the UK tax system that affects all VAT-registered businesses, including contractors. By understanding what MTD is, and how it affects you. Also, what steps do you need to take to comply with the new requirements? Also, you can ensure that you are ready for the transition to digital tax reporting. Whether you are already VAT-registered or expect to exceed the threshold in the future. Thus, it’s important to start preparing for MTD now to avoid any last-minute rush to comply with the new requirements.
An Overview of Making Digital Tax VAT
With Making Tax Digital VAT, you must submit VAT Returns via software if you have a business that falls within its scope.
And you need to keep your VAT records digitally.
MTD for VAT means you need to use accounting software that can link to HMRC’s systems to go for a VAT Return (or use a computerized accounting process that can do so).
And with VAT Return filing dates on the horizon. You must follow the rules.
In fact, HMRC might have sent you an email or letter highlighting what you have to do now regarding Making Tax Digital.
Since 14 November 2022, you will no longer use your current VAT online account to file quarterly or annual VAT Returns (although for certain businesses, HMRC has provided an extension.
What was April 2022 mandating of Making Digital Tax VAT all about?
Making Tax Digital VAT applies to all VAT-registered businesses (apart from digitally excluded ones).
Any businesses registered for VAT but under the VAT threshold (currently £86,000) didn’t have to abide by MTD for VAT when the latest legislation was first rolled out in April 2022.
But that changed in April 2023, when the compulsory use of MTD for VAT for those businesses began.
Running a VAT-registered business and new to MTD for VAT?
Unless exempt, you must follow the MTD rules from the first full VAT accounting period post-1 April 2022.
Using MTD for VAT-compatible accounting software does not on its own mean you’re compliant.
Though you do not need to signup for the scheme (as HMRC does this automatically), you’ll need to ensure the feature is on within your software and that you are keeping digital accounting documentation.
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When should companies start following Making Tax Digital for VAT?
The rule is easy for businesses new to Making Tax Digital VAT.
By law, assuming you are under the VAT threshold. Thus, are a ‘voluntary filer,’ you must start following to Making Tax Digital from the initial day of your first VAT period that starts on or after 1 April 2023.
Therefore, for example:
- If your VAT period had a 31 March 2023 end date, your first VAT quarter under MTD for VAT starts on 1 April 2023.
- If your VAT period has a 30 April 2023 end date, your first VAT quarter under MTD for VAT starts on 1 May 2023.
- If your VAT period has a 31 May 2023 end date, your initial VAT quarter under MTD for VAT starts on 1 June 2023.
And since 1 November 2022, you’ve no longer been in a position to file quarterly or annual VAT Returns using your current VAT online account, as this method has been discontinued.
Now, you need to utilize MTD-compatible software to file your VAT returns. Ensure you’re doing that, or you could face a penalty from HMRC.
(Do you file your VAT Returns annually? You should still make every effort to submit in accordance with MTD. This is even though HMRC has given a short extension for all businesses to get compliant by 15 May 2023.)
When should businesses file their MTD for VAT returns?
Remember that a VAT return and payment have to be usually be filed within a calendar month. You get six days after the VAT accounting period concludes.
However, you should always take a look at the filing deadline for your business. This is in the online VAT account on HMRC’s website.