Have you heard of Making Tax Digital? Announced in the March 2015 Budget, Making Tax Digital is the UK government’s initiative to “end the tax return” and get small businesses regularly reporting to HMRC online.
If you’re drawing a blank, you’re not alone – our recent survey found that 43% of freelancers and micro-businesses didn’t know what Making Tax Digital was, even though it will significantly change the way many of them manage their business finances.
There haven’t been many details until now, but HMRC has just released new consultation documents outlining its plans. You can review and give feedback on the consultation until November but, in the meantime, here are the key points about Making Tax Digital that freelancers need to be aware of:
Everyone will have to file digitally
The bell is tolling for paper records – once Making Tax Digital is fully rolled out, HMRC will require businesses to use accounting software or other “digital record-keeping software” that can link to HMRC's digital accounts. It won’t be providing its own bookkeeping/accounting software, and instead will be relying on software providers like FreeAgent to provide tools.
Info will be required at least quarterly
This doesn’t mean businesses will need to file four tax returns a year! Instead, businesses will need to send “summary information” about their income and expenditure four times a year, or more frequently if they prefer. HMRC is hoping that this will be a simple thing to do since all of your bookkeeping information would already be held digitally.
£10,000 threshold for sole traders and partnerships
At the moment, HMRC is proposing that Making Tax Digital would only apply to sole traders and partnerships with a turnover or annual income above £10,000. It is likely to also apply to limited companies, but we don’t have the details yet - HMRC has promised a separate consultation for limited companies and their directors later this year.
Optional voluntary payments
HMRC isn’t planning to change the current tax payment dates but is proposing that businesses have the right to make “voluntary payments” towards their tax liabilities throughout the year. This will mean that businesses can decide how often and what amount they want to pay, offering them more flexibility.
New penalty system for late filing
HMRC is proposing to get rid of the current penalty system for late submissions of tax payments. Instead, it would change to a “points” system (similar to driving licence penalty points) and a financial fine would only be imposed when the points reach a certain number.
The roll out of Making Tax Digital has already started!
Digital tax filing is planned to start from April 2018, but the implementation of Making Tax Digital has already begun with the rollout of digital accounts for every small business owner and individual taxpayer.
This article was written by Emily Coltman, Chief Accountant at FreeAgent, the online accounting software specifically designed for freelancers, contractors and micro-businesses, covering everything from invoicing to tax. Emily features in A Field Guide to Freelancer Finances, a free ebook of business finance tips – download your copy.