As a creative business owner, ‘Making Tax Digital’ is a phrase you can’t have helped hearing over the last few years.
Making Tax Digital (MTD) is an ongoing government initiative that aims to modernize the UK tax system by replacing paper tax returns with digital ones. One of the key components of MTD is the requirement for individuals and businesses to use software to record and report their income tax through the self-assessment process.
Naturally, at AO Accountants we help our clients working in the creative industries navigate all aspects of their business finances, including MTD. You can read more about how we help our clients on our case studies page here…
The idea behind MTD is to make the tax system more efficient, accurate, and secure. By switching to digital tax returns, the government hopes to reduce errors, streamline the tax collection process, and make it easier for taxpayers to understand and comply with their tax obligations.
The MTD scheme has been implemented by the Government over a period of years, starting in 2019 which saw a change to the way VAT-registered businesses were required to keep records and report VAT taxable turnover if they were above the VAT registration threshold. This was further extended to all VAT-registered businesses in 2022, regardless of turnover.
In real terms, this meant that if you were a creative business turning over £85,000 or more in 2019 you would have been required to register for VAT. Fast-forward to 2022, if you were a creative business that had registered for VAT but you did not meet the required VAT threshold of £85,000 you would still be required to submit quarterly VAT returns.
Why might a business choose to register for VAT before they reach the VAT threshold?
There are several reasons why a creative business that does not meet the required VAT threshold may choose to register for VAT regardless. These can include:
- You are regularly paying software subscriptions that have VAT added to the price (which would allow you to claim the VAT back).
- You are intending to invest in expensive equipment such as computers or cameras (and you want to claim the VAT back).
- You are looking to make a certain impression about the size and turnover of your company and set expectations about your fees.
- You find that your ideal clients will only work with VAT-registered suppliers.
- You only want to work with businesses of a certain size and turnover (who in turn will be VAT registered) which helps you pre-qualify clients who may be ‘price shopping’ or looking for the cheapest company.
What is Making Tax Digital (MTD) for Income Tax Self-Assessment (ITSA)?
Making Tax Digital has evolved, and its next phase is to introduce the digital process to individuals who take a profit from their business. This is known as Making Tax Digital (MTD) for Income Tax Self-Assessment (ITSA).
The AAT website describes MTD for ITSA directly as:
“Under the requirements of MTD for ITSA, individuals who are subject to income tax on the profits of their trade, profession, vocation or property business will be required to keep their accounting records electronically (either using suitable software or on a spreadsheet) and file quarterly returns to HMRC with details of their income and expenditure together with any other information that HMRC specifies. A final end-of-period statement will then be submitted after the tax year to complete the individual’s tax affairs”.
HMRC’s MTD for ITSA would require over 4 million self-employed business owners to file tax returns multiple times per year, beginning in April 2024, as well as requiring some individuals to invest in new or updated tax software to do so.
Delay in implementing the MTD for ITSA rollout
However, in December, HMRC announced they have postponed the date for MTD for ITSA. Originally due for launch in April 2024, this particular arm of the initiative has been deferred to 6th April 2026. However, the scheme had already suffered delays and setbacks due to the COVID pandemic, with an original launch date slated for April 2023.
The requirements of the MTD for ITSA scheme will affect you if you run a creative business that is registered for Income Tax Self-Assessment and you have a gross self-employed income of more than £50,000 per year. It should be noted too, that those who currently report taxable income via Self-Assessment will also be affected by the upcoming requirements.
For individuals earning between £30,000 and £50,000 it is suggested that they will be required to adhere to the MTD for ITSA scheme come April 2027.
At AO Accountants we help entrepreneurs and business owners with all their tax obligations, regardless of their business structure. We have accounting service packages to suit all kinds of business and we use and train our clients in QuickBooks software to help streamline the process of ensuring you pay the correct amount of tax, and fulfil your tax obligation both on time and accurately.
Visit the AO Accountants website for more information about our services and to find out how we can help your creative business.
