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Making Tax Digital

The changes to the taxation system known as Making Tax Digital for VAT began to come into effect on 1st April, 2019. These far-reaching reforms of the tax system have been introduced with the aim of making the business of filling out tax returns simpler and easier to manage for both freelance contractors and those who run their own small businesses.

Of course, when it’s possible for them to do so, many of these contractors and business owners bring in accountants with experience of tax matters to help them complete their returns, so that they can focus on day-to-day business operations.

Who does Making Tax Digital apply to?

Making Tax Digital for VAT applies to all companies that are registered for VAT and that have a taxable turnover higher than the threshold for paying it, whether they are based in London, Manchester, Liverpool, or any other part of the UK. This threshold is £85,000 and the switch to using the new digital system began with accounting periods that started later than 1st April, 2019. Those companies that fall within this category are expected to use the new Making Tax Digital format that has been provided by HMRC to store the necessary financial records online and submit their VAT returns for the year.

A company or individual whose taxable income has fallen below the threshold for VAT payments at any time later than the 1st April, 2019 start date for Making Tax Digital still has to keep financial records digitally and use the new software to complete their VAT return. This means that the changes affect a significant number of business owners and contractors in the UK, and many are seeking advice from qualified professionals to ensure that they are in compliance with them.

Although the reforms have been introduced with the express intention of making the VAT process easier, this does not necessarily mean that it is easier for every individual – especially if they are trying to get used to the new system when submitting a return using it for the very first time. It represents a major change to the way in which tax returns are worked out and submitted, and comes on top of the many other everyday issues that those running a business have to cope with.

It is vital for small businesses and contractors to ensure that they complete work for clients on time and to the best possible standard, and for that reason, many of them will continue to look to professional accountancy firms to help them navigate the Making Tax Digital system so that they can focus on the work they are trained to do instead.

Why has it been introduced?

The government chose to implement this digital tax system to try to reduce the number of mistakes that are made when completing tax returns, which can be very expensive. A study carried out by the government revealed that errors of this kind were leading to costs of more than £9bn every year for the Exchequer, so it is easy to see why it was considered to be a good move.

The online financial records that are required under Making Tax Digital allow for greater accuracy, while the fact that the reformed system sees the data go to HRMC directly from these online records means that there is much less chance of mistakes occurring during the transfer of them. Of course, if more companies used accountants with expert knowledge of completing tax returns, this would also greatly help to reduce the number of these mistakes and the money that is wasted as a result of them.

Could my business be too small for Making Tax Digital?

A number of small firms in different parts of the UK, from places in the South East like London and Cambridge to those in North West areas like Liverpool and the Wirral, have profits that are under the £85,000 threshold for VAT. However, Making Tax Digital can still be relevant to them. These companies have the option of choosing to sign up for the reformed system and they are being encouraged to do so by HMRC. Getting advice from an accountant with in-depth knowledge of tax matters will help business owners and contractors who fall into this category to decide whether this is the right course of action for them.

If they make the decision to opt into the service, they will have to begin keeping digital financial records from the start of their next accounting period. Those firms or individuals that already keep digital records will have to make sure that the provider of the software they are using is making it compatible with Making Tax Digital. Information about the compatible software currently out there is available on the official UK government website, although professional tax return accountants will probably know already what software they can and cannot use. Whether a business owner is required to use the new system or opts to do so of their own volition, they have to go through the sign-up process before they can begin using it.

While HMRC has indicated that it will show leniency to those contractors or business owners who experience some difficulty adjusting to Making Tax Digital, those who submit a return after the deadline can still be hit with financial penalties as a result. Running your own small business is exciting but can also come with financial ups and downs – especially in the earlier stages – so few owners will be able to afford to be hit with a fine. A reputable firm of accountants will ensure that the return is completed according to the new rules and within the allotted time, so that this does not become an issue.

Help from the experts

Making Tax Digital is a major change to the tax system in the UK and one that affects a great many businesses and contractors. Wainwrights is a long-established firm of accountants based on the Wirral, in Bromborough, but we provide tax accountancy services to companies throughout the North West. Give us a call today to see how we can support your business in dealing with this change.

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