February 21, 2023

HMRC is Making Tax Digital - Here’s everything you need to know if you’re a Sole Traders or Service Business Owner

What does Making Tax Digital mean?

Making Tax Digital is an initiative the government have introduced to improve the way UK business tax is managed. It involves moving all pen-and-paper tax returns online.

What tax changes have happened so far for VAT-registered businesses?

Since April 2019, VAT-registered businesses with a taxable turnover above the VAT threshold (currently £85,000) have been required to keep VAT records digitally and send returns using Making Tax Digital (MTD) compatible software.

What are the latest changes to MTD?

The original changes stipulated that all VAT businesses need to make the change to Digital Tax from April 2022.

Due to economic uncertainty, the government has pushed this date back. The new rules are based on your business's income.

If you earn over £50,000 then you will need to make the switch to Digital Tax by April 2026. These changes will also apply to businesses earning over £30,000 by April 2027.

What does Making Tax Digital mean for sole traders?

If you’re a sole trader who earns over £50,000, then by April 2026 you will need to make your tax digital for all your income tax. 

If you earn over £30,000 then the same will apply to you from April 2027.

This means you will no longer be able to use traditional tax returns, but will be required to use digital accounting software and submit your tax returns every quarter.

Can you opt out of Making Tax Digital?

No, MTD is not optional, it is a requirement for businesses earning over £85,000. If your business earns over £50,000 you will also need to make the switch by 2026. However, it is possible to apply for an exemption if it is not possible for you to use computers, software or the internet.

Possible reasons for this might be your age, a disability, where you live or religious grounds.

To apply for an exemption contact HMRC

I manage a UK business, what do I need to do to make my tax digital?

For starters, you’ll need compatible accounting software to submit your VAT records to HMRC online. Popular options include Xero, Quickbooks and Sage. Alternatively, you can also submit your digital tax records as basic spreadsheets, as long as you use a bridging software like Zapier. 

After you’ve chosen your software, you need to contact your new software provider to help you get set up. 

For further details head over to the gov.uk page, ‘Making Tax Digital for VAT’. When you do sign up, you will need your:

  • Business email address
  • Government Gateway user ID and password
  • VAT registration number
  • Latest VAT return

So gather this info first. 

And if you don’t have a Government Gateway user ID / password  yet, that’s fine, you can create them via this link too and bring your tax online at the same time.

You’ve brought your accounting online, now manage it the easy way with Payaca

Payaca makes accounting easy by integrating with Xero, Quickbooks and thousands of other apps to automatically update your business records. It’s easy to set up, saves you hours of admin and the best part is - when you’re set up, the only action you’ll need to take is clicking the ‘export’ button at the end of the tax year. Easy peasy. 

Try Payaca for free and see why thousands of businesses all over the UK are using it to simplify their accounting.