As a UK contractor, it’s essential to stay up to date with changes in the tax system that may affect your business. One of the most significant changes in recent years is the introduction of Making Tax Digital (MTD). MTD is a UK government initiative that aims to make the tax system more efficient and effective by requiring businesses to keep digital records and submit tax returns online.
If you are a UK contractor, it’s important to understand what MTD is, how it affects you, and what steps you need to take to ensure that you comply with the new requirements.
What is Making Tax Digital?
Making Tax Digital is a UK government initiative that aims to modernize the tax system by requiring businesses to keep digital records and submit tax returns online. Under MTD, businesses are required to keep digital records of their income and expenses using compatible software. They must then use this digital data to submit their tax returns online to HM Revenue & Customs (HMRC).
MTD was introduced in stages, with the first phase affecting VAT-registered businesses with a turnover above the VAT threshold (£85,000). From April 2023, MTD will be extended to all VAT-registered businesses, regardless of their turnover. From April 2024, MTD will be extended further to include income tax and corporation tax.
How Does MTD Affect Contractors?
If you are a contractor who is VAT-registered, you will need to comply with the MTD requirements from the relevant deadline. This means that you will need to keep digital records of your income and expenses using compatible software and submit your VAT returns online through the HMRC’s MTD portal.
If you are not yet VAT-registered but expect to exceed the VAT threshold in the future, it may be worth considering whether you need to start preparing for MTD now. Even if you are not yet required to comply with the MTD requirements, it’s a good idea to start using digital accounting software and keeping digital records so that you are ready when the time comes.
How Can You Prepare for Making Tax Digital?
To comply with the MTD requirements, you will need to use compatible accounting software to keep digital records of your income and expenses. There are many different software packages available, ranging from basic spreadsheets to more advanced cloud-based accounting systems. It’s important to choose a software package that is suitable for your business and that you are comfortable using.
In addition to choosing the right accounting software, you will also need to ensure that you are familiar with the MTD requirements and that you have a plan in place to comply with them. This may include training staff on how to use the accounting software, setting up processes to ensure that all transactions are recorded accurately, and ensuring that you have a reliable internet connection to submit your tax returns online.
Making Tax Digital is a significant change to the UK tax system that affects all VAT-registered businesses, including contractors. By understanding what MTD is, how it affects you, and what steps you need to take to comply with the new requirements, you can ensure that you are ready for the transition to digital tax reporting. Whether you are already VAT-registered or expect to exceed the threshold in the future, it’s important to start preparing for MTD now to avoid any last-minute rush to comply with the new requirements.