Making Tax Digital for the Self Employed: What You Need to Know

We’re sure you’ll have seen lots of information flying around about HMRC’s impending roll out of the Making Tax Digital scheme - but what we’re finding is that many people aren’t entirely sure what (if anything) it means for them.

With that in mind, and being the helpful souls we are, here is what you need to know and what you need to do. If anything.

What is Making Tax Digital (MTD)

Let’s begin at the beginning.

MTD is the government drive to simplify and take the whole tax reporting system online. Ultimately, it will replace all VAT and tax submissions with a more regular, digital reporting process.

As with payroll before it, HMRC want to take people away from paper-based systems to ones where all reporting is done digitally - in fact, once MTD comes into play, paper records will no longer meet the legal requirements under tax legislation.

However, unlike payroll before it, HMRC will not be providing a free software product to help facilitate the change. Instead, you will need to upload your information digitally using a compatible software product such as a cloud accounting package. 

Unfortunately, this does mean that there may be an additional cost involved, especially as free cloud accounting favourite Wave isn’t currently listed as a compatible provider (nor is it on the list of those aiming to be compatible by April) - disappointing news for many freelancers.

We’ll look at your options later in this piece, and you can find a full list of compatible software providers here.

MTD will begin to roll out on 1 April 2019, beginning with VAT reporting. 

For all businesses required to comply, it will replace the existing VAT Online service, where over 70% of businesses currently log on and manually enter their VAT figures.

Will MTD affect me?

Eventually, MTD will affect everyone who accounts for their, or their business’s, taxes. However, the initial roll out in April 2019 relates only to VAT reporting.

So the simple question is - are you required to be VAT Registered?

If you’re not sure whether you should be registered or not, you are required to register for VAT if your Business has a turnover above the threshold - currently set at £85,000 per annum.

If you’re not required to be registered, then MTD won’t affect you (yet). 

If you’re voluntarily VAT Registered and under the VAT threshold, you’re not required to comply with MTD requirements in April 2019 and can keep recording and reporting your VAT as you do now, for the time being.

If you are already registered for VAT (or you need to register), then the new MTD regulations will apply to you from 1 April 2019.

Deferrals and Exemptions

A small range of businesses can defer their entry to the MTD scheme for 6 months (to the 1 October 2019) - including trusts, local authorities, annual accounting scheme users and “not for profit” organisations which are not companies (so includes some charities).

You can find a full list here on the HMRC website.

There are also some exemptions. These include:

• Businesses entirely run by people whose religious beliefs are incompatible with the requirements (for example, if they are prohibited from using computers)
• You’re going through bankruptcy procedures
• You can’t easily keep your records or submit your returns digitally (for example, because of disabilities, age, location)

To confirm whether you meet the criteria for exemption, speak to HMRC’s VAT Helpline.

When will MTD replace Self Assessment?

MTD for Income Tax won’t be rolled before April 2020 at the earliest, with plans still at draft stage and not yet approved by Parliament. We will cover this in more detail at a later date when things are more concrete.

If you would like to know more in the meantime, here is an excellent piece from ICAEW.com.

If MTD for VAT affects you, don’t panic. Here is a simple plan to get you ready for 1st April.

Plan Stage One: Get an Online Government Gateway Account

If you’re already VAT registered, chances are you already have one of these - it’s what you currently use to log into HMRC’s VAT Online Service.

If you haven’t already got one, set this up first.

To do this, go to https://www.gov.uk/government-gateway 

You’ll be asked to create a password and you’ll be given a user ID.

Other than the obvious (name, date of birth, email), you’ll need your National Insurance number to hand.

You should do this as soon as possible. HMRC send your activation code by post and you can’t complete the setup until you have received it. 

Plan Stage Two: Work out when you’ll have to submit your first MTD VAT Return

MTD for VAT comes into force on 1 April 2019, so your first VAT Return after that date will be the first you make under the new scheme.

Plan Stage Three: Set up your Accounting Software

Unlike they did with payroll, HMRC won’t be providing their own free software, so you will either need to use a compatible Cloud Accounting package or a combination of spreadsheet/s and compatible bridging software to submit your figures.

Here again is HMRC’s list of compatible providers, including those who are working to be compliant for April.

The list contains most of the leading Cloud Accounting providers, including Quickbooks, FreeAgent, Xero and Sage. It also details what each of the services offers within their platform.

Sadly for those using the free cloud accounting service Wave, it is not currently on either list.

There will be a “soft landing period” of one year following the introduction of MTD for VAT, during which time businesses will be able to manually fill in the 9 VAT boxes on a spreadsheet which can then be linked to HMRC using simple bridging software.

However, from 1 April 2020, the data must be digitally linked. This will either require a more sophisticated combination of spreadsheet/s and bridging software which are yet to be confirmed, or a move at that stage into a cloud accounting package.

Because of this, our considered advice to clients is to choose a simple, compatible cloud accounting package now.

Though this may seem daunting at first, the leading packages offer lots of free training and online help to help you get set up. And, despite the initial learning curve, time-saving features such as recurrent invoicing, automatic bank feeds and automated invoice reminders might just prove to be a revelation.

If you have an Accountant, it’s best to check with them which they suggest. If you’d like to chat things through with one of our Tax or Accountancy experts, just email us at info@primustax.co.uk or call 0845 6711105.

Plan Stage Four: Practice makes perfect

If you have everything set up, a VAT period in between now and the 1 April and the desire to just get on with it, you might be eligible to join the pilot scheme and begin filing under the new rules. 

That way, you can make sure you’re ahead of the game when MTD becomes mandatory.