Taxation is an unavoidable part of life, and it’s not going anywhere anytime soon. While the thought of tax may seem daunting to some, it’s really just a necessary evil. If you are reading this article, chances are you know that you need to pay your taxes, but you may not know how or when. In this guide, let’s look at Making Tax Digital (MTD) so that you can understand the ins and outs of this new system.
Why is the UK Going Digital with Taxes?
There are a few reasons why the UK is making tax digital i.e going digital with its taxes. First, going digital will help make the tax system fairer by reducing the number of people who don’t pay their fair share of taxes. Second, going digital will make it easier for taxpayers to comply with their tax obligations. With so many people working in the gig economy and for themselves, it can be hard to keep track of your income and taxes. Going digital will make this much easier by requiring taxpayers to submit their data online. Third, making tax digital will help the government save money. It costs a lot of money to collect and process tax returns.
MTD for Businesses
If you’re a business owner, you’ll need to start submitting your taxes digitally once the new Making Tax Digital system goes live on April 2020. This applies to both VAT and Income tax and covers both self-employed individuals (i.e. if you’re running a sole proprietorship) and employees. The key change for businesses is the requirement to submit their taxes monthly. Before, you would submit your taxes once a year, but now you will need to submit your taxes monthly. While this may seem like a big change, monthly submissions make sense when you consider that taxes vary depending on the season. For example, during the winter months, people spend more on heating, and this creates more taxable income for the government.
MTD for Individuals
If you are an employee, you don’t have to change how you report your taxes. However, if you are self-employed, working as a contractor, or running an online business, you will need to start reporting your taxes digitally. This includes if you’re using an accountant to manage your taxes. While the new rules do include monthly reporting, they also allow quarterly filing. This means that if you’re self-employed, you can make your tax payments every three months instead of every month. The key here is that you need to make sure that you have enough money to cover your tax bill each month. If you don’t have enough, you may be charged interest and/or penalties.
How to Comply with MTD
If you’re an individual who has to comply with the new digital tax rules, you can do so by signing up for a digital tax account. If you’re a business owner, you’ll need to sign up for a digital tax account for both the business and for each contractor working for your business. If you’re an individual, you can sign up for a digital tax account by going online and using the HMRC online service. If you’re a business owner, you’ll need to sign up on GOV.UK. Once you’ve signed up, you can link your bank account to your digital tax account so that the government can automatically debit your account each month. This makes it easier to keep track of your expenses and income.
As you’ve seen in this MTD guide, the Making Tax Digital system is pretty straightforward. The changes are designed to make the system simpler for taxpayers, both in terms of reporting their income and paying their taxes.