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Kristian Charles Williams

Kristian Charles Williams

Sep 25, 2021

MTD. Making Tax Digital. What you need to know as Freelancers

TAXO'D Self Employed Guide to HMRC Making Tax Digital (MTD)

As a Freelancer, What do I need to know about making tax digital?

Freelancers of the Revolution! Are you prepared for the digital future of tax automation? Go Go Digital !

Paper-based tax returns are so yesterday, and digital reporting is like .. um ... well .... so the future –

Like it or fear it. Love it or Loathe it. Whether you're ready or not. MTD is an acronym straight outta Cyberdyne, and just like a T1000 .. it's a coming for you !

It may come as a relief that MTD has absolutely nothing to do with Monstrous Transmitted diseases. It is in fact just an acronym for the government scheme to move UK taxation into the digital age - and stands for Making Tax Digital.

It will require freelancers, contractors and sole traders to keep digital tax records and submit VAT returns using HMRC approved digital software. HMRC believe that making a digital tax system compulsory is necessary to make tax life easier, more seamless and more accurate for businesses, landlords and the self-employed, as well as individual taxpayers too.

Here at TAXO'D we were one of the first (SAAS) software companies to align ourselves with MTD and we wish to make the transition for all freelancers as pain-free as possible. So we’ve compiled this guide to MTD addressing concepts, key dates and requirements.

TL;DR - What is Making Tax Digital?

  • In the UK, HMRC is making UK business go digital. Making Tax Digital (MTD) requires all organisations under its mandate to maintain digital records and use only approved and compatible software to file tax returns. MTD aims to improve overall efficiency and minimise lost tax revenues.
  • MTD is being rolled out in phases so within a few years, expect to see all paper-based tax filing banned in the UK.
  • HMRC aim is to make it simpler for freelancers and startups to get their tax right first time. Every time.

Who is currently affected by MTD?

MTD currently only affects VAT registered businesses.

People and businesses earning over £85,000 (and hence above the VAT threshold) are the only demographic currently affected by MTD. If you fall into this group, make sure you register for MTD VAT, as you need to start keeping digital records and submitting your VAT returns (and be aware of VAT deadlines) using MTD compatible software. Making Tax Digital for VAT began on 1 April 2019. The deadline for this has recently been updated as a result of the COVID-19 pandemic. Now, businesses have until their first VAT period following April 1st 2021 to sign up to Making Tax Digital for VAT.

TAXO'D blog - Making Tax Digital

In future, who will also be affected by MTD?

MTD will shortly come into play for Income Tax payers and Corporation Tax payers. (Corporation tax software to follow)

Making Tax Digital was set to be mandated on income tax and corporation tax in April 2020, but due to disruption from the COVID19 pandemic. The new proposed date is April 2021. So Making Tax Digital Self Employed is fast approaching.

With MTD for Income Tax, you will submit any personal income and tax reliefs claimed at the end of your accounting period. It is at this time that you will also submit your annual final declaration and then pay the tax owed by January 31st of the following year.

How can I sign up for Making Tax Digital?

To register to MTD the information you will need to sign up with your:

  • Business name
  • Email address
  • National Insurance number (NIN)
  • Unique Tax Reference (UTR number)
  • Accounting period information
  • The accounting type you use
  • Government Gateway log in and password
TAXO'D TOP TIP - Sign up to MTD. Once signed up, you will be required to keep digital records of all quarterly income and expenses. This should be done through your MTD-for-income-tax-compatible-accounting-software (which you will need to of signed up for before signing up for MTD)

Am I eligible for to sign up for MTD?

Currently, to sign up for Making Tax Digital for individuals you will need to be:

  • A resident of the UK
  • Registered for Self Assessment (with up to date returns and payments)
  • A sole trader making income from one business and/or a landlord renting out property in the UK

How do I stay compliant MTD for Income Tax?

Reading HMRC guidelines, follow these steps and you should be compliant with MTD moving forward:

  • Sign up via the online service
  • Use MTD compatible software
  • Record income and expenses digitally
  • Submit Income Tax updates to HMRC every 3 months (or more regularly at your discretion)
  • Report your business income accurately, including any personal income and reliefs claimed
  • Submit a final declaration at the end of each accounting period

Being successful with MTD requires access to technology, the ability to use technology and a good connection to the internet. HMRC is reportedly willing to make any business or making tax digtal landlords exempt from the electronic elements of bookkeeping and filing should they be able to prove they are unable to use them. (Lordy only know how that will be determined, but I would love to be a fly on the wall for those tests.)

TAXO'D blog - Making Tax Digital

Who is exempt from Making Tax Digital?

Ah the HMRC 'digitally excluded list.' More sort after than an invite to Clubhouse! Being 'Digitally excluded' refers to people who are unable to use or engage with digital accounting software for reasons of:

  • Age
  • Disability
  • Religion
  • Location

The government have not given more insights to the specifics of these excluded groups, but expect more updates as 2023 grows nearer.

When is the Making Tax digital deadline for Income Tax?

HMRC have outlined that you will be required to sign up for MTD for income tax for your next accounting period that starts either on (or following) April 6th 2023.

If you are keen to test the water sooner (and are eligible), you can sign up for the MTD initiative now and comply on a voluntary basis.

How do I prepare for Making Tax Digital?

Research the software - Apparently a common search is for 'making tax digital free software'. Maybe it does exist and maybe it will be compliant but make sure to do your research and decide on suitable tax filing software - HMRC requires the tax filing software you use for MTD to be compatible with their systems. (No no. miraculously they aren't using analogue tape-to-tape storage as we first feared) as ultimately this end to end filing is going to be linking all of your digital data directly to HMRC.

TAXO'D TOP TIP - TAXO'D is one of many tax software options you can use that are compatible with MTD and comes with many further features that will assist you and your business gain a better overview of your business. This includes features like generating invoices and integrating with your bank.

Set some money aside - There is no admin fee for MTD but HMRC have indicated an average cost of £300 to make the transition to MTD. Which covers things such as: the opportunity cost to learn new software, investing in the new software, upgrading hardware where necessary, and any associated accountancy fees.

Speaking of accountants ..

Speak to your accountant! There is nobody better qualified to assist you with any MTD related questions you may have. If you don't already use an accountant, now might be the perfect time to consider it.

TAXO'D blog - Making Tax Digital

Luddite much?_?

If you just want to 'tick the MTB boxes' (to be MTD compliant) and you would prefer to save money AND don't need the other features found with awesome tax-filing apps. Then bridging software can be a good option. Making Tax Digital Bridging Software is nothing more than a digital link between your current method of bookkeeping and HMRC.

Believe it or not, as a Freelancer .. MTD should make your life a hell of a lot easier.

The whole intention of MTD is to do away with the rigmarole associated with the loathed - annual Self-Assessment tax return.

(It is worth noting that you will still need to send HMRC a Self Assessment return for the tax year prior to you registering for Making Tax Digital.)

With income and expenses being recorded and kept digitally in a 'real time' fashion - HMRC believes this will lead to freelancers, self-employed and businesses being able to pay their taxes themselves. And get their taxes filed correctly the first time.

The advantages which come with MTD for Income Tax are plentiful and something which will, with time hopefully transform the way we do business for the better.

  • Filing tax returns will be quicker
  • Submitting tax returns will be more efficient
  • Online billing makes paying tax owed more streamlined
  • Automation means less risk of human error
  • Moving away from paper filing is more 'Ecofriendly'
  • Businesses and freelancers have a more complete overview of their tax profile
  • Tax information is available throughout the year
  • More chance of getting your tax right first time

Worried about your side hustle in the gig economy? HMRC says businesses with annual sales under £10,000 won’t be mandated to take part in MTD – though they are free to opt in if they want to take part.

TAXO'D blog - Making Tax Digital

Just like a trip in the 18-yard box, you risk a penalty if you don't comply with MTD

Breaking the rules could land freelancers a penalty of up to £500, though HMRC says its taking a light approach to enforcement for the time being.

The message is clear however. Sole trader or mid-sized business, automating your tax filing process is now compulsory.

Remember, HMRC have commented that they are hoping MTD will put an end to (or certainly minimise) tax evasion and tax underpayment due to errors. You are going to be expected to show that you’re doing your best to comply with MTD and (where applicable) VAT filing.

The TAXO'D tax return app is HMRC Compliant Software for Making Tax Digital

Under MTD freelancers must use government-approved software to transmit their income tax return digitally. Have peace of mind when choosing TAXO'D, remember that we are fully MTD complaint, and 100% compatible with HMRC systems.

We are a HMRC recognised software supplier and FCA approved.

TAXO'D is a salary tax calculator. You record as you go (on your phone or your computer) day by day, throughout the tax year. As the weeks unfold and you are actively recording your income and expenses. With TAXO'D personal tax app - you will see in real-time displays the tax and National Insurance that you owe. With TAXO'D tax return software know exactly what tax you owe and when you owe it. Simple.

TAXO'D mobile tax tool does away with the need for an accountant, saving you further money and time. If you are earning money independently and responsible for your own taxes then sign up today. And find out why TAXO'D is the best self assessment software for freelancers and contractors.

Tax Sucks! Spend less time and money on it with TAXO'D tax filing app

Disclaimer: This is simply a guide and should not be treated as tax advice. Contact HMRC directly if you need tax advice.

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TAXO'D blog Author

Kristian Charles Williams

Head of Growth, Partnerships & Mugician

A freelance human and one that resides in creative industries. For the best part I have been an independent musician and a (not-so-independent) composer.

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TAXO'D.  Beautiful, simple, award-winning, end-to-end accounting solution for freelancers. Record as you go. Know what you owe. Tax return, done. TAXO'D.  Beautiful, simple, award-winning, end-to-end accounting solution for freelancers. Record as you go. Know what you owe. Tax return, done. TAXO'D.  Beautiful, simple, award-winning, end-to-end accounting solution for freelancers. Record as you go. Know what you owe. Tax return, done.
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