A Boring BUT Essential read for freelancers, side hustlers and business owners
If you haven’t heard about Making Tax Digital by now you certainly will over the next 18 months or so. So do keep reading this even though it’s obviously about Tax!
What is Making Tax Digital
Making Tax Digital is an HMRC flagship project designed to get all tax return information filed digitally.
I can hear you say that you already do that and you’d not be wrong there!
What’s different with the next phase of this HMRC project is that the focus will be on filing your SELF ASSESSMENT TAX RETURN (SATR) quarterly rather than annually.
Yep that’s FOUR returns each year instead of ONE; in fact FIVE as HMRC say that you’ll need to file a final declaration to sweep up any adjustments and year end postings!
It’s not all bad news as filing your tax return information in this way will make life much easier for business owners as well as enable you to have a much better control of the business finances without having to become an accountant or even proficient in bookkeeping, accounting and tax.
Don’t fear – this all can be very easy. Read on to find out how!
What do HMRC need you to do?
First let’s look at what HMRC want from you and when.
Under the Making Tax Digital regime HMRC will require you to:
- keep digital business records
- use Making Tax Digital compatible software
- send them quarterly income and expenses updates
- submit an annual final declaration which will replace the Self Assessment tax return
Who needs to comply with the Making Tax Digital Rules?
If your taxable self employed business turnover (that’s income before costs and not profit) or your income from property is above £10,000 you MUST follow the new rules.
When do you need to comply with Making Tax Digital?
The new rules will apply from the accounting period that starts on or after 6 April 2023.
So for most this will mean following the new rules for the 2023 / 2024 tax year which runs from 6th April 2023 to 5th April 2024. The Self Assessment tax return for this year would usually have been due by 31st January 2025 but instead you’ll file your first quarterly figures from July 2023.
Making Tax Digital is Easy with simple to use tech
This may sound like a lot of work but it really isn’t if you use the right tech which will practically take care of everything for you – all you need to do is to keep things up to date and follow some very simple rules.
And the tech need not cost a fortune – in fact you can get it for FREE!
FREE Banking Apps for Making Tax Digital Easy
My favourite combo at the mo for all your accounting and tax needs (other tech is available!) is FreeAgent with either a NatWest business bank account or Mettle App (the NatWest modern banking app solution similar to Monzo or Starling).
Having a NatWest business or Mettle account gives you FreeAgent for FREE.
Use the bank card provided for any costs. Invoice your clients from Mettle or FreeAgent and get your customers and clients to pay you directly into the bank. Use the FreeAgent App to record any out of pocket expenses and explain your transactions as you go.
All in all this tech combo puts accounting at the heart of your business rather than an afterthought and something to dread.
The simple rules for Making Tax Digital Easy
Once you have the software then there’s just three simple steps to follow to nail your accounting.
Step 1 – put ALL business transactions through your business bank account & avoid paying for personal stuff out of that account. Keep your personal finances separate through a personal bank account
Step 2 – pay yourself money from the business in one of the following ways only:
- Out of Pocket Expenses – any amounts paid from your own pocket (your cash, personal credit cards or your private bank account)should be reimbursed to you from the business bank account by way of an “Expenses Claim” – simply list what you spent from your own funds (not anything already paid from the business bank account) and pay that EXACT amount from the business bank account into your personal bank account
- Money to live on – Obviously you’ll need money to live on. However before you take any funds out of the business you’ll need to make sure that you leave enough to cover any tax obligations (e.g. income tax, corporation tax, VAT or PAYE). Frankly the safest and sure-fire way of preventing you over spending or using money that doesn’t belong to you (but belongs to the tax man) is to use a tech solution which will show you the amount of funds left for you to extract from the business. Then, depending on your business structure, you’ll extract funds by way of DRAWINGS for sole traders or a combination of DIVIDENDS & SALARY for those operating via a limited company structure
Step 3 – set up the link between your business bank account and your chosen software – most systems called this setting up the BANK FEED. In reality this drags in all of the transactions from your business bank account into your accounting software. All you need to do then is “explain” the transactions (post it to the correct account heading) which accountants would call “doing the bookkeeping”. This really is simple and is made much easier as the software will remember where similar transactions were posted to in the past and suggest this as the explanation for new transactions – you just need to simply approve that as the correct posting.
If you keep on top of this and doing it regularly (dip into your software a couple of times a week) it can take no more than moments.
Watch this space
As time progresses further information from HMRC about Making Tax Digital will be made available. If you want to keep up to date with news, views and how to nail Making Tax Digital then join our mailing list:
Start doing Making Tax Digital Easy NOW
Whilst there’s no need for you to pass your data to HMRC four times a year right now there is no reason why you cannot and should not start to operate your finances using the THREE STEP Making Tax Digital Easy routine straightaway.
Keeping up to date puts you in control of your business finances allowing you to make informed decisions with exactly the right information at hand from your chosen supporting tech.