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Making Tax Digital – Facts

Survival guide (for the self employed)

Many self employed taxpayers and property landlords are unaware of HM Revenue and Custom's radical plans to transform the tax online filing system.

The Facts

  • The way that you report your business profits to HMRC is changing.
  • From April 2017 the cash reporting rules change for the self employed and for property landlords.
  • From April 2019 VAT registered traders will have to report to HMRC under a new Making Tax Digital reporting sequence.
  • From April 2020 the self assessment tax return is being replaced by five new reporting obligations made during and after the tax year.
    • Your first tax return under the new system is due in the forth month of you accounting period, you will then have to file with HMRC every three months.
  • If you are not already using software for your record keeping/ accounting, you will need to learn how to use a spreadsheet, or some type of accounting software or App.
  • You will need a reliable internet connection and a facility to store your electronic data.

What equipment (hardware) and software or Apps do I need?

  • Your requirement depends on you, how you feel about technology and the nature of your business.
  • Every business is different.
  • If you use an accountant you can continue to do so.
  • You can delegate all your bookkeeping and online filing to an accountant, tax adviser or bookkeeper if you feel you cannot cope with this new system.
  • If you are one of the 2 million taxpayers who do not engage any professional help in reporting to HMRC you need to decide which system to use.
  • Accounting using a phone is not for everyone: choose what may be best for you from the table below.

 

Equipment/system: Phone or Tablet Apps Computer/tablet & Spreadsheet Computer/tablet &

Accounting software

About you/your business (not all will apply: chose the ones which may apply to you) You own a smart phone or a tablet

You always have a good internet access or a phone signal.

You are happy to enter data onto your phone or tablet

You rarely need to issue paper invoices: your customers don’t want or expect receipts

Your expenses are pretty simple and you don’t expect to have many queries

You don't give customers credit

You do not have many transactions in a tax year

You mainly receive your income in cash and pay out your expenses in cash

You keep a separate business bank account

You like to do your bookkeeping every day.

You have access to a computer

You have internet access. Internet and phone signals may be restricted

You would rather use a big screen/don’t like/don’t use a phone for data entry

You are familiary with spreadsheets / you are not good with software/technology

You need a simple system to replace your manual bookkeeping system

You pay for goods using cash or bank card or credit card

Your income comes in by cash, cheque or online banking

You do quotes for customers, or your customers like receiving invoices

You allow basic credit to customers

You have a business bank account or you use one bank account for business and private transactions

You have a computer

You would rather use a big screen/don’t like to use a phone for data entry

You are OK with software

You are willing to learn new systems

You pay for goods using cash or bank card or credit card

Your income comes in by cash, cheque or online

You do quotes for customers, or your customers like receiving invoices.

You need credit control.

You have a business bank account or you use one bank account for business and private transactions

Present bookkeeping method(s) may include: You keep receipts for payments, total up mileage per MOT certificate, maybe use a diary and total up everything at the end of the tax year using bank statements.

You keep a paper cash book

You enter details on tax return once a year.

You maintain a receipt book or keep a pile of issued invoices to record sales

You keep receipts in a box, and enter them in batches during or at the end of the tax year

You manually check over your bank statements to check you have captured all the relevant income and expenses

You keep a paper cash book, or use a spreadsheet to summarise your income and expenses.

You enter details on tax return once a year.

You do all your bookkeeping using your software

You generate an invoice for your sales from your software and you like to keep receipts on paper and then enter them in batches into the software

You might sometimes use a spreadsheet for summaries.

You enter details on tax return once a year.

Changes with Making Tax Digital You have real time recording of income/sales

You record all your income and expense on your phone and store the data in the cloud.

Your App sends your bank receipts and payments to your summary for HMRC. You have to check each transaction to set up the system, you will need to manually enter your cash sales and purchases.

Your App sends your figures to HMRC every quarter, You still have to make the usual accounting adjustments at the year end in the final year end report.

It is best to avoid using a personal bank account for business. This will make your bank feed more complicated

You use a spreadsheet instead of a paper book to:

  • List your sales/invoices
  • List and analyse your expenses

Your spreadsheet will now have to link to HMRC to allow quarterly reporting. Software will become available to do this as the software market grows.

Depending on the results of its test pilots, HMRC may allow you to manually enter your quarterly figures.

You still have to make the usual accounting adjustments at the year end.

Your software will need to be updated to allow MTD filings.

If your software does not have a bank feed then you can update to add that.

You still have to make the usual accounting adjustments at the year end.

It is best to avoid using a personal bank account for business. This will make an automatic bank feed more complicated.

Verdict Good for very small technically minded business with reliable internet who like entering data on phones/tablets daily. Good for any size of business if you prefer a simple system where you can see all your transactions on a big screen and you don't have to do bookkeeping daily. Good for any size of business if you prefer a system where you can see all your transactions on a big screen and you don't have to do bookkeeping daily, provided that you are happy to learn new software.

 

Digital exclusion opt out

  • If you are reading this guide you are probably online and this might not apply.
  • You will be excluded from the electronic bookkeeping and filing elements of MTD if you are unable to handle it, due to age, disability or location, or if it is contrary to your religion.

Five tax returns per year

The first tax year to be affected is 2020/21. This runs from 6 April 2020 to 5 April 2021.

Assuming you choose an accounting period that is co-terminus with the tax year your:

  1. First report will be due in June/July 2020.
  2. Second report will be due in Sept/Oct 2020
  3. Third report will be due in Dec 2019/Jan 2021
  4. Your Self Assessment tax return for 2019/20 will also be due by 31 January 2021.
  5. Fourth report will be due in March/April 2021
  6. Fifth and final year-end report deadline: probably January 2022 in the first year.

You will be able to change your accounting period and quarters. The end of year report then becomes due at the earlier of 10 months following the year end and 31 January.

If you currently use the cash basis (or would like to)

From April 2017:

  • The entry threshold for the cash basis increases to £150,000, and the exit threshold to £300,000.
  • The current general disallowance of capital expenditure will be replaced by a more specific disallowance for certain assets (including those not used up within 20 years).

HMRC are still looking at changes to basis periods, and simplified reporting with fewer adjustments.  More detail is expected later this year.

See Cash or accruals accounting toolkit

If you are a landlord with receipts under £150,000

From April 2017

  • The cash basis will be the default method for unincorporated businesses.
  • The accruals basis will only be used if:
    • Receipts are over £150,000,
    • You elect to use it instead, or
    • You are a company, an LLP, a trust or a partnership with corporate members.

See Cash basis for property businesses

Tax payments

  • You will be allowed to voluntarily pay your taxes as you go: the detail is still being decided.
  • Eventually it is likely that you will be required to make four payments per year on account of tax.

Penalties

  • There will be no late filing penalties for at least a year while the new system beds in. After that you will suffer penalties if you file your returns late.
  • Penalties already apply for errors in returns or documents.
  • Late payment interest already applies.

See our videos on MTD penalties

Summary
Click our logo to get the facts on Making Tax Digital
Title
Click our logo to get the facts on Making Tax Digital
Description

Many self employed taxpayers and property landlords are unaware of HM Revenue and Custom's radical plans to transform the tax online filing system. 

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