Tax has come out of the dark ages and embraced technology. While you still may want a professional to take care of your financial records, it’s never been easier to submit a tax return. In this article we take a look at why and how HMRC became a global leader in the effort to digitise tax.
Embracing technology to improve tax processes
For many years it felt like government institutions were lagging far behind the private sector when it came to embracing technology. The speed and efficiency from digital systems were nowhere to be found in the halls and offices of the tax authority. This changed in the 2010s when a vision of a new tax system was embraced. One that brought all the benefits of a modern, online platform.
This was largely due in recognition of what businesses had already been doing for many years. Most financial records for account and tax were already purely digital. Her Majesty’s Revenue and Customs (HMRC) claimed an ambitious goal to become the most digitally advanced tax authority in the world, and they have largely succeeded. To carry out this, they needed to completely revamp their systems and processes, as well as enable easy communication between themselves and businesses. This is what became the Making Tax Digital (MTD) initiative.
After several years of work and development, an initial beta of the programme was launched in April 2019. VAT-registered firms who qualified – needing an annual revenue of £85,000 or more – were able to join the program at their discretion. The advantages were quick to see and appreciated by the more than 1.4 million businesses who had registered in just a year since the start of the initiative.
While there has been a grace period for businesses who do not meet the income threshold, from April 2022 all businesses will be required to register for MTD. Overall, Making Tax Digital has been considered a great success. We will take a look at how this works for businesses and the self-employed below.
VAT Returns and Making Tax Digital
Since MTD came into effect, businesses must now use compatible software to submit their VAT Returns directly. Some businesses still prefer to only use spreadsheets for their financial records. To accommodate for this, HMRC has approved bridging software that enables spreadsheets to be directly submitted through to the tax authority.
Income Tax and Making Tax Digital
As with a business, if you are self-employed or a landlord whose yearly turnover exceeds £10,000, will need to submit your tax return. This means you will now need to submit returns four times a year at the end of each quarter. You won’t need to make any adjustments to these returns as they are a straightforward summary of your income and expenses. After submission, it will give you an overview of your current tax status. It is only with your last return for your financial year that any tax due will be finally calculated and you can claim any appropriate tax reliefs or credits.
Making Tax Digital is an ongoing initiative
As of April 2022, all VAT-registered businesses must be enrolled in the MTD programme. For landlords and the self-employed with an annual turnover of £10,000, enrolment for MTD is currently voluntary until April 2024. Other important dates for MTD include April 2025 for general partnerships with a yearly turnover of £10,001 and April 2026 for general partnerships with a revenue of less than £10,000. At present, the earliest possible date that MTD would be implemented for Corporation Tax is April 2026, although this may be subject to change according to HMRC.