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What is Making Tax Digital?

Making Tax Digital is an initiative by the Conservative government to “make it easier for individuals and businesses to get their tax right and keep on top of their affairs” with the creation of a digital tax system.

HMRC aims to transform tax administration to go paperless so that the tax system is simple, efficient and effective. When announced by George Osborne in 2015, it was hailed as the end of the dreaded tax return.


When does Making Tax Digital come into effect?

Making Tax Digital is being rolled out gradually in the UK as to avoid disruption.
The first phase (VAT only) came into effect in April 2019, with income and corporation tax expected to follow in April 2020 and April 2021.



Is Making Tax Digital just for VAT?

So far, making tax digital only applies to VAT-registered businesses with a taxable turnover above the VAT threshold of £85,000.
There will be further announcements from HMRC about the next phase in April 2020 and how it relates to tax.



Making Tax Digital for Corporation Tax

Making Tax Digital will not be rolled out for corporation tax and income tax until at least 2020, and most likely will come into effect in 2021.
For now, it’s just applicable VAT that you need to take care of.



Is Making Tax Digital compulsory?

Making Tax Digital is compulsory if your taxable turnover is above £85,000.

However, there are exemptions. Making Tax Digital is not mandatory if:

  • Your religion prevents you from using a computer
  • It is unreasonable for you to use a computer based on your age, location or disability
  • Your business is subject to an insolvency procedure
  • You’re already submitting VAT returns online

If you fall under any of these categories, contact HMRC.  You’ll need to provide your VAT Registration Number, business name and principal place of business. You’ll also have to explain the reason for your exemption request and why you cannot comply with Making Tax Digital.



What do I need to do for Making Tax Digital VAT?

To stay compliant with Making Tax Digital VAT regulation, you’ll need to purchase the compatible software to submit your information.

There are numerous pieces of software available, but one of the most common pieces of digital VAT software is Xero – perfect for Making Tax Digital.
Xero is an accounting software that handles tax and HR activities such as paying tax to HMRC.

You’ll also need to learn how to use the software, which can be a complex process.



How much does Making Tax Digital software cost?

Despite government recommendations that Making Tax Digital software will cost just £280 across 4 hours, we believe it will cost small-to-medium-sized businesses over £5,000 to install the software needed to comply with the government’s Making Tax Digital regulations.

Alongside this, due to the complex nature of the process, it could take up to 100 hours for you to become fully comfortable using the software.
The government will not be providing free or subsidised software.

An accountant using Xero – a software compatible with Making Tax Digital compliance – can reduce the impact for you.



What are the pros and cons of Making Tax Digital?

The benefits of Making Tax Digital include:

  • More accurate data thanks to reduced human error
  • Quarterly reports help you keep tabs on your finances
  • Your personal tax file shows liabilities and entitlements
  • No more complex end-of-year tax forms

The drawbacks to Making Tax Digital may include:

  • Up to £5k needed to invest in software
  • Hours of training needed to learn how to use software
  • Loss of profit due to investment and hours spent training
  • Loss of profit = less tax for HMRC

There has certainly been much debate about how the initiative will play out, but the government has carried out trials over the last few years (using volunteers) and deemed them a success.



What does Making Tax Digital mean for self-employed?

For the self-employed, Making Tax Digital simply means you must follow the same rules as everybody else.
You’ll need to provide quarterly updates; digitally processed and as transparent as possible.



Making Tax Digital for landlords

Making Tax Digital will also impact landlords who receive rental income greater than £10,000.

However, as there is no VAT on non-commercial rent, this will not be enforced in the VAT phase.
Landlords will therefore need to get on-board in April 2020.



What are the penalties for not complying with Making Tax Digital?

If you fail to comply with Making Tax Digital regulations, there will be penalties imposed by HMRC.
However, there are many variables as it depends on different factors. For the first year, penalties will be less strict as the initiative is rolled out.

This in-depth article has more information.



Can an accountant help me with Making Tax Digital?

Yes! Making Tax Digital accountants can help you every step of the way.

Tim Taylor Chartered Accountants are experts at handling tax and VAT for both businesses and individuals, having served Swansea and the South Wales area with distinction since 2004.

Tim Taylor is a certified partner for Xero bookkeeping and accounting software. This means there is no-one better placed to offer trusted, professional assistance.

If you’re unsure about any aspect of Making Tax Digital, or need any other financial advice, please do get in touch.

Call Tim Taylor free on 01792 363444 or email