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Making Tax Digital: A guide for small businesses

Making Tax Digital: A guide for small businesses

Taxes—we may not like them, but we all have to pay them. While no innovation can make the process of reporting your taxes more fun, there are ways to make it a little easier and less error-prone.

In this blog post we take you through HM Revenue and Customs’ new Making Tax Digital initiative: what it means for your business and how Lightspeed can help. We answer the following questions:  

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Disclaimer – The information in this publication is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and relevant information, we do not guarantee that the information in this blog post is accurate at the date it is received or that it will continue to be accurate in the future. Nothing in this blog post is intended to be relied on as advice, whether legal, financial, tax or otherwise, and this blog post is not a substitute for consulting your own professional advisors.

What is Making Tax Digital and how does it work?

Making Tax Digital is an ongoing initiative by HMRC to make the process of recording and reporting taxes more efficient. The aim is to make digital tax records and return the norm for businesses by 2023.

By going digital, HMRC (and the treasury) will save itself considerable time and money. Taxpayer errors cost the treasury upwards of £9.9 billion in revenue between 2017 and 2018.

It also benefits the taxpayer, helping them get a clearer view of their taxes and stay on top of their affairs.

With so many businesses already using digital accounting software, HMRC saw the need to adapt. The end goal is to phase out the paper tax records entirely.

What does Making Tax Digital mean for my business?

The application of Making Tax Digital will happen in phases. The phase at which MTD applies to you will depend on your business’s taxable turnover and the type of tax you’re paying. Currently, MTD only applies to VAT-registered businesses.

Is Making Tax Digital compulsory and what is the threshold?

Since April 2019, Making Tax Digital for VAT has required VAT-registered businesses with a taxable turnover above £85,000 to keep digital records and use accounting software to file VAT returns.

As of April 2022 it will be compulsory for all businesses to file and record their taxes digitally, regardless of taxable turnover.

HMRC also encourages businesses below the VAT threshold to apply for MTD voluntarily. It’s not yet obligatory for them to do so, but it will give them a better understanding of their performance.

The digital records you’re required to keep include:

  • Business name and address 
  • VAT registration number and information regarding VAT accounting schemes
  • VAT on supplied goods and services (anything you sell, lease or hire)
  • VAT on received goods and services (anything you buy, rent or hire)
  • VAT rate for goods and services supplied
  • Changes made to a tax return
  • Time and net value (before VAT) on the goods you buy and sell
  • Reverse charge transactions—where businesses record both the sales price and the purchase price of goods and service bought.

Find more information on the digital records you need to keep here

How to comply with Making Tax Digital

To comply with Making Tax Digital, there must be ‘digital links’ between the data in your VAT return and invoices issued and received. Any changes made to this data, such as excluding non-deductible VAT, will render your records non-compliant.

Whereas manually updating data through bridging software or copy-and-pasting it into a spreadsheet was considered compliant as of April 2019, this will no longer be the case after April 2021.

After this date, copy-and-pasting VAT data into a spreadsheet will no longer meet MTD’s requirements. The use of bridging software will still be permitted as long as there have been no manual changes made to the data provided.

To make things easier for businesses, Lightspeed Retail now features two reports required for MTD compliance:

  • Transactional VAT Report
  • Retail Accounting Report

The reports provide a clear record of all VAT that has either been paid, or is awaiting payment. They’re free for all Lightspeed Retail merchants to download then upload to HMRC.

Other leading accounting software providers include:

Get compliant with Lightspeed

Recording and reporting taxes shouldn’t be distracting you away from what you do best: running a business. That’s why Making Tax Digital aims to make it easier for everyone involved.

With Lightspeed, you gain the tools you need to save time, work more efficiently, and drive your business forward. Want to know more? Let’s talk.

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