Four things plumbers need to know about Making Tax Digital

January 21, 2020

Words by Damon Anderson, director of operations, Xero UK
Making Tax Digital is a compulsory HMRC initiative designed to make the UK tax system more efficient and effective for individuals and businesses. Having come into play in April 2019, this new legislation means that businesses over the £85k VAT threshold must now use a digital system to complete their tax returns.
Whilst this legislation came into effect last year, for many business owners there is still some confusion over how the system works. For plumbers who are unsure of what this change means for them, here are four key things to know about Making Tax Digital.
1. Why do I need Making Tax Digital compatible software?

If your plumbing business is registered for VAT and your taxable turnover is above the VAT threshold (currently £85,000), you must keep digital business records and send your VAT returns to HMRC using MTD-compatible software. For the vast majority of businesses, this applies to accounting periods that started on or after 1 April 2019.
To work out what information you need to send to HMRC, you can use spreadsheets or an in-house record keeping system. However, you will still need to use MTD-compatible software to send your information to HMRC. This means you will no longer have to fill in the boxes on the HMRC website - making the tax returns process much easier and quicker.
If you’re still feeling unprepared for MTD, you can visit Xero’s Making Tax Digital Hub to browse a range of resources and information.Damon Henderson on making tax digital
2. What about corporation and income tax?
The government is now looking to extend MTD to include corporation and income tax. Whilst there’s no set date of when this will occur, plumbers should be aware that they may have to start reporting these taxes through the MTD system. We would suggest keeping an eye out for when the details of this change are announced, though they’ve said it won’t be until at least April 2021.
3. What are the benefits?
Many small plumbing businesses don’t have accounting software in place. Instead, they tend to rely on manual processes and keeping paper receipts safe between jobs, before sending them on to their bookkeeper or accountant to prepare their tax returns. MTD will help make life as a plumber much easier. Once you’ve made the switch, MTD will streamline how you manage your VAT returns, leaving you more time to focus on running your business. If you choose to use cloud accounting software such as Xero to do your VAT returns, you can also keep on top of your finances in real-time.
MTD makes tax returns much more accurate. The improved accuracy, along with the fact that the information is sent directly to HMRC from the digital records, helps to reduce the amount of tax lost to avoidable errors. For business owners, this also means increased visibility and a reduced workload, which will help you plan and budget more effectively.
4. What if I submit information late?
From April 2020, a points-based system will be in place for late submissions, with the soft landing period coming to an end. This means that if you submit late, you will receive a penalty. 
Penalties work on a point-based system. You’ll incur points each time you’re late with a submission, per tax and penalties will be incurred once you pass a certain threshold of points. However, penalty points will not be permanent and will expire after a period of good compliance.



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