What is Making Tax Digital (MTD)?

Making Tax Digital (MTD) is a key part of the UK government’s strategy to modernize the tax system. It aims to make the process of managing taxes more effective, efficient, and easier for taxpayers by requiring businesses to keep digital records and submit tax returns online using compatible software.

Overview of the Extended Strategy

The MTD initiative began with VAT-registered businesses and is now being extended to cover more aspects of tax reporting. The extended strategy includes:

 

MTD for VAT

 

Initial Phase: Since April 2019, VAT-registered businesses with a taxable turnover above the VAT threshold (currently £85,000) have been required to keep digital records and submit their VAT returns using MTD-compatible software.

Extension: From April 2022, all VAT-registered businesses, regardless of turnover, must comply with MTD requirements.

 

MTD for Income Tax Self Assessment (ITSA)

 

Implementation: From April 2026, self-employed individuals and landlords with annual business or property income above £50,000 will need to follow the MTD rules for Income Tax. Those with income above £30,000 will need to comply from April 2027.

Requirements: These taxpayers must keep digital records of their income and expenses and send quarterly updates to HMRC via MTD-compatible software.

MTD for Corporation Tax

 

Consultation Phase: HMRC is currently consulting on the implementation of MTD for Corporation Tax. The timeline and specific requirements are still being developed, with a pilot expected to begin before the official rollout.

 

What is Cloud Accounting?

Cloud accounting involves using online software to manage your business’s financial records and transactions. Unlike traditional accounting software that is installed on a local computer, cloud accounting solutions are accessible through the internet, allowing users to manage their accounts from anywhere, at any time.

 

Benefits of Cloud Accounting

Accessibility

 

Anywhere, Anytime Access: Access your financial data from any device with an internet connection, providing flexibility and convenience for managing your accounts on the go.

Real-Time Updates: View real-time financial data, ensuring you always have the most current information for decision-making.

Collaboration

 

Multiple Users: Easily collaborate with your team and accountants by granting them access to your financial data.

Real-Time Collaboration: Work simultaneously with others on the same financial documents, improving efficiency and communication.

Cost-Effectiveness

 

Reduced IT Costs: No need for expensive hardware or software maintenance, as updates and backups are managed by the service provider.

Scalability: Easily scale your accounting solution as your business grows without significant additional costs.

Security

 

Data Security: Benefit from advanced security measures, such as encryption and multi-factor authentication, provided by cloud accounting service providers.

Automatic Backups: Ensure your data is automatically backed up, reducing the risk of data loss.

Integration

 

Software Integration: Seamlessly integrate with other business applications, such as CRM systems, payroll software, and e-commerce platforms, for streamlined operations.

Automation: Automate routine accounting tasks, such as invoicing, expense tracking, and bank reconciliations, saving time and reducing errors.

How Cloud Accounting Supports HMRC’s “Making Tax Digital” Strategy

HMRC’s “Making Tax Digital” (MTD) initiative aims to transform the tax system, making it more effective, efficient, and easier for taxpayers to get their tax right. Cloud accounting is a critical tool in achieving the goals of MTD. Here’s how it helps:

 

Digital Record Keeping

 

Compliance with MTD Requirements: Cloud accounting software ensures that your financial records are maintained digitally in a format that complies with MTD regulations.

Accurate and Up-to-Date Records: Automatically capture and organize financial transactions, minimizing errors and ensuring that your records are always accurate and current.

Seamless Filing

 

Direct Submission to HMRC: Many cloud accounting platforms have built-in functionality to submit VAT returns and other tax filings directly to HMRC, simplifying the compliance process.

Timely Submissions: Automate reminders and submissions to ensure that you never miss a filing deadline.

Enhanced Visibility

 

Real-Time Tax Calculations: Instantly calculate tax liabilities based on real-time financial data, helping you stay on top of your tax obligations.

Proactive Tax Planning: Use real-time insights to make informed decisions about tax planning and management.

Efficient Data Management

 

Data Accuracy: Reduce the risk of manual errors by automating data entry and calculations.

Consistent Updates: Benefit from continuous software updates that ensure compliance with the latest tax laws and regulations.

Improved Transparency

 

Audit Trail: Maintain a clear and detailed audit trail of all financial transactions, which is essential for compliance and auditing purposes.

Documentation: Easily store and retrieve digital copies of invoices, receipts, and other supporting documents.

 

By adopting cloud accounting, businesses can align with HMRC’s “Making Tax Digital” strategy, ensuring compliance while enjoying the numerous benefits of modern, efficient, and secure financial management. At Finassyst, we are committed to helping our clients leverage the power of cloud accounting to simplify their tax obligations and enhance their overall financial health. Contact us today to learn more about our cloud accounting services and how we can support your business in the digital age.