HMRC is making tax digital to make it easier for individuals and businesses to get the tax right. HMRC first announced its initiative to make tax digital in 2015 by introducing a personal tax account. Personal tax account allowed individuals to manage their tax and related records online rather than using conventional methods, which involved extensive phoning and writing to HMRC. In 2019 HMRC started its first phase of making tax digital. The first phase involved making tax digital for VAT which involved keeping digital records and using accounting software to file for VAT. HMRC launched phase 2 of making tax digital on April 2021. HMRC is looking forward to tackle businesses that are manipulating their spreadsheets manually to reduce their annual tax. In phase 2, HMRC has set a goal to expunge over a billion pounds in VAT errors and manipulation. Furthermore, HMRC will be imposing full VAT penalties, which were suspended for the last 2 years due to the pandemic.

Important “Making Tax Digital” deadlines

April 2019: VAT registered business with turnover above £85,000 have to keep digital records

October 2019: Complex businesses who deferred April 2019 deadline need to get their record digital

April 2022: Business having lower turnover than £85,000 also need to comply with making tax digital

April 2023: Making tax digital will also be applicable to people having business or property income more than £10,000 a year.

Implications of Making tax digital on businesses

HMRC is focused on making tax digital for businesses through its Making Tax Digital scheme. This scheme is limited to VAT-registered businesses but will eventually encompass all business types. Here I will guide you on how to register for filing tax digitally and its implications.

Making Tax Digital for VAT

The VAT registered businesses with taxable turnover above £85,000 need to keep digital records and send their VAT returns to HMRC digitally. The deadline for making tax digital for these businesses was 1 April 2019. You could also voluntarily sign up for making tax digital if your turnover is below the VAT threshold. HMRC claims that digitalization will help businesses to understand their performance better.

In August 2020, the government announced, VAT registered businesses with annual turnover lower than £85,000 shall also file their tax digitally, which will be applicable from April 2020.

What do you need to include in digital records?

Digital records will include:

  • Business information such as name and contact details
  • VAT number and related
  • VAT details
  • VAT paid and received
  • Any adjustment to the returns
  • Tax point
  • VAT rates charges on supplies manufactured
  • Reverse charge transaction
  • (DGT) daily gross taking for retail scheme users
  • Assets purchased you can reclaim tax on if you use the Flat Rate Scheme
  • Records of multiple supplies your business made or received
  • Value of sales and total output tax on Gold Accounting Scheme purchases
Making Tax Digital for sole traders

HMRC is looking forward to making tax digital for sole traders by April 2023. It will apply to landlords and self-employed people who make over £10,000 annually. You can also sign up for a digital tax returns pilot scheme that lets you record and send income tax updates to HMRC digitally. Signing up for a pilot scheme is not compulsory. However, approximately thirty percent of businesses and landlords have voluntarily signed up for the digitalization scheme.

Making tax digital for Corporation Tax

For now, HMRC has not announced any plans on making corporation tax digital. The reason behind this could be complexities in filing for corporation tax. HMRC is evaluating how it is present digital schemes roll out before making any further initiatives.

Software’s for digital record keeping and filing

If you are looking forward to filing taxes digitally, you will need compatible software to do so. You can visit GOV.UK website to look for software compatible with HMRC. One of the software that is compatible with HMRC is Xero Cloud Accounting software. However, numerous other software’s are also available. Xero can renovate the way you manage your accounts. It helps you identify key aspects of your finances while letting you focus on your business growth. If you are interested in using Xero for your accounts, we can guide you on using the software and help you transfer data from your existing system into Xero. LYEL Accountants also offers different Xero subscription packages for you to choose from as per your business requirements.


Ishfaq Shah

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