Complete Guide to Making Tax Digital For Income Tax

Making Tax Digital is a set of rules that require businesses with a turnover of £10m or more to keep track of their sales and purchases, report them quarterly, and upload the information to HMRC online. These requirements apply from April 2019 for businesses that meet the threshold, as well as any business that has an accounting period that begins on or after April 2020. If you have a small business with a turnover of less than £10m, this article doesn’t directly affect you. However, if your turnover is close to meeting the threshold, it’s worth reading so that you can get ready in time. This Complete Guide to Making Tax Digital For Income Tax explains all you need to know about this new initiative and what it means for smaller businesses like yours. 

What does Making Tax Digital mean for Small Businesses?

Tax Digital is a set of rules that require businesses with a turnover of £10m or more to keep track of their sales and purchases, report them quarterly, and upload the information to HMRC online. These requirements apply from April 2019 for businesses that meet the threshold, as well as any business that has an accounting period that begins on or after April 2020. If you have a small business with a turnover of less than £10m, this article doesn’t directly affect you. However, if your turnover is close to meeting the threshold, it’s worth reading so that you can get ready in time. This Complete Guide to Making Tax Digital For Income Tax explains all you need to know about this new initiative and what it means for smaller businesses like yours. 

Which small businesses have to make tax digital?

The rules for Tax Digital mean that businesses with a turnover of more than £10m per year must start keeping digital records of their sales and purchases. If your business has a turnover of less than £10m, you don’t have to do anything. This threshold applies to the accounting period (usually a year). So, if your business has a turnover of £9,999,999 in any given year, you don’t have to do anything. If your turnover is £10m in any given year, you will have to report using Tax Digital. 

What does Making Tax Digital mean for your business?

If you have a business with a turnover of more than £10m, you will have to report to HMRC using Tax Digital. This means keeping digital records of sales and purchases and reporting quarterly. If your business has a turnover of less than £10m, you don’t have to do anything. If your business has a turnover of £10m or more, you will have to report to HMRC using Tax Digital. This means keeping digital records of sales and purchases and reporting quarterly. If your business has a turnover of less than £10m, you don’t have to do anything. 

Change 1: Record of sales and purchases

At present, you are only required to keep an accurate record of your sales and purchases if they are greater than £100,000 per year. This threshold has been removed for Making Tax Digital. So, if you have a low-turnover business and sell goods or services for less than £100,000 per year, you don’t have to keep accurate records. This changes for businesses that have a turnover of more than £10m per year, which means most businesses fall into this category. 

Change 2: Monthly tax reporting

At present, if your business has a turnover of less than £100,000 per year, you report income tax every three months. If your turnover is above £100,000 per year, you report your income tax every month. This distinction for Making Tax Digital is only for businesses that have a turnover of less than £10m per year. 

Change 3: Quarterly tax reporting

At present, if your business has a turnover of less than £100,000 per year, you report your VAT and PAYE deductions every three months. If your turnover is above £100,000 per year, you report VAT and PAYE deductions every month. This distinction for Making Tax Digital is only for businesses that have a turnover of less than £10m per year. 

Summary

The rules for Making Tax Digital mean that businesses with a turnover of more than £10m per year must start keeping digital records of their sales and purchases. However, as a general rule of thumb, any business operating in today’s day and age should move towards digital methods of keeping and maintaining finances. That way, not only will they entirely comply with the tax norms, but they will also eliminate a lot of headache that would have otherwise crept in in case of manual bookkeeping. So, if you are a small business, your goal should be to take Making Tax Digital seriously, and shifting to digital ways of managing books and finances!