What is Making Tax Digital and how it will affect your business?

This year, all businesses in the UK that bring in more than £85,000 in revenue will have to comply with HMRC’s new Making Tax Digital regulation. However, many SMEs are still uncertain about whether Making Tax Digital applies to them – and if it does, what steps they need to take to comply. 

Here’s our guide to the main things SMEs need to know about the regulation and how they can best prepare their businesses. 

what is making tax digital

What is Making Tax Digital?

The most important thing to note is that only the smallest businesses will be exempt from following the Making Tax Digital rules. The HMRC offers small businesses that don’t cross the £85,000 mark (this is the VAT registration threshold stated by HMRC) the option to also comply on a voluntary basis. However, if your business crosses the  £85,000 barrier, then read on. 

With Making Tax Digital, the HMRC is looking to make the UK’s tax system more effective and efficient for taxpayers. And it’s doing this through what is in effect top-down digitalisation: mandating businesses, accountants and bookkeepers to maintain records and submit VAT returns digitally. The digitalisation of VAT tax processes will make it easier for individuals and businesses to get their tax right and keep on top of their affairs. 

You can find a full list of the records that will need to be digitalised under the new rules here

When do you need to comply?

The short answer is ‘now’. Making Tax Digital came into effect for most businesses in April 2019 for VAT returns, and firms are expected to have applied the rules for their first VAT return following that date. 

There are two exceptions here. One is a deferral group. Businesses in this group will have been contacted by HMRC, so you will know who you are, and you have until October 2019 to get your plans in place. The second exception is if you use the VAT GIANT service, in which case HMRC will inform you separately about when you need to adopt the rules. 

An important thing to note is that the Making Tax Digital rules currently only apply for VAT returns – no other taxes are included. What’s more, the UK Government has stated that the regulation will not be extended to any new taxes or businesses in 2020.

How do you comply?

On the face of it, achieving compliance is simple. All businesses need do is implement a compliant software package that allows you to keep records and submit VAT returns. Alternatively, firms can install compatible ‘bridging software’ that links spreadsheet software to HMRC’s systems.  

However, with so many accounting software packages on the market, knowing which is both right for your business and compliant with the Making Tax Digital rules can be a challenge. This is where we can help. Our  accounting software listing gives you the ability to search over 100 accounting software services, read user reviews and discover the best options for your business.

Confirming compliance 

However, our catalogue alone isn’t enough. Once you have narrowed down a shortlist of options for your new accounting software, it is important to check that it is compliant with the new rules. Doing so couldn’t be easier. HMRC has produced a simple-to-use search function so you can check whether a given software package meets the Making Tax Digital criteria. The search tool can be accessed here

Cross-referencing our catalogue with HMRC’s compliance checker is the best approach to finding high-quality software that adds maximum value to your accounting processes while also ensuring you’re ready for Making Tax Digital. 

The final step

Once you have selected and bought your software choice, you’re ready to sign up to Making Tax Digital using the Gov.UK site. For businesses that do not pay their VAT by Direct Debit this needs to be done at least 72 hours before your return is due. For those that do, you need to sign up at least five working days before your return’s due date.

Making Tax Digital applies to nearly all SMEs and you do need to act. But doing so couldn’t be easier – and by utilising the right search tools you can ensure your compliant software performs to your requirements.