Staying on top of tax regulations and guidelines is crucial for anyone running their own business. Rules change frequently, but learn here what the Making Tax Digital (MTD) and VAT guidelines are, and if they apply to your business based on your turnover. This article will cover:

  • How to calculate turnover
  • What is Making Tax Digital?
  • What are the Making Tax Digital thresholds?
  • What is VAT?
  • What is the VAT turnover threshold?

How to calculate turnover

When dealing with HMRC around tax matters, you may see the term ‘turnover’ mentioned often. HMRC uses turnover to understand what tax bracket you should be paying, as well as if you meet the threshold for paying VAT or other types of tax.

Turnover refers to the amount of money a business makes from its product or service after taxes (like VAT) are applied to an invoice. Your total turnover may also be called gross income or net sales, and is the total amount of money you charged to customers (before you take off any business expenses).

You can calculate your business’ turnover easily using the formula below. Make sure you use the same timeframe for all your calculations (eg, all sales within a month, or three month period) to make your figures more accurate.

For a product-based business:

Turnover = number of units sold x price per unit

For a service-based business, you will need to total up every sale you’ve made to your clients in a time period. Adding up your total sales using invoices and bills paid by customers should be relatively simple if you’ve been keeping good records of all your transactions, and you could use an Excel sheet to do it quickly if you haven’t got accounting software that can provide this number for you. 

In each example, if you’ve given discounts or applied VAT to your prices, make sure to use the final sum the customer has actually paid. Otherwise, you may have an inflated income total and could pay higher tax rates on it.

What is Making Tax Digital?

Making Tax Digital (MTD) is a government initiative to change how businesses file their taxes. It is encouraging digital record-keeping through MTD-compliant accounting software. By encouraging companies to move away from paper-based processes and manual input, the government hopes it will become easier, and more effective for individuals and businesses to get their taxes right and paid on time.

When you need to register for Making Tax Digital largely depends on your turnover levels, and using the information above you should now know what your turnover is. 

So does Making Tax Digital apply to your business? Using your turnover figure, let’s look at the thresholds.

Making Tax Digital for Income Tax

MTD also applies to self-employed business owners and landlords that have a turnover above £10,000. Self-employed businesses and landlords will need to register for MTD for Income Tax and follow the associated rules by April 6th 2023.

HMRC is currently running a live pilot to test and develop MTD. Some companies and estate agents are already using accounting software to keep digital records and submit tax returns to HMRC. You can take part in this trial and send Income Tax updates to HMRC instead of filing self-assessment tax returns.

Making Tax Digital for Corporation Tax

Currently, there is no MTD threshold for Corporation Tax in the UK, as HMRC and the UK government recently finished a consultation in March 2021. This consultation looked at how MTD might be implemented for companies that need to file Corporation tax returns across various industries and sectors but it isn’t expected to become mandated before 2026.

Making Tax Digital for VAT

Businesses, large or small, need to register for VAT when their turnover reaches the VAT threshold. When registering for VAT, at the same time businesses will also need to register for Making Tax Digital, meaning they will have to maintain digital records and use accounting software to submit their VAT returns. 

What is VAT?

VAT is short for Value Added Tax. This is a charge added to the price of many goods and services for consumers. The tax is set at 20%, but consumers in the UK do not pay VAT on food, children’s clothing, books, magazines or charity shop items. 

Living expenses, such as domestic gas and electricity bills, energy-saving devices and children’s safety car seats, also have a reduced VAT rate of 5%. 

Businesses with a turnover of £85,000 or more are legally required to register for VAT. So smaller businesses are not as likely to have the extra 20% charge on their products if they are not meeting this threshold.

Once they are registered, the business will likely increase their prices to charge the 20% VAT to their customers, and they pay this over to HMRC. 

What is the VAT turnover threshold?

If a self-employed person or business is making over £85,000 a year, they are required to register for VAT. This threshold changes slightly every year and usually goes up on the 1st of April. 

If a business is not making this much in turnover over a twelve-month period, then it will not need to register. However, you can register to pay VAT voluntarily even if your business does not meet the £85,000 threshold.

If your business is not making £85,000 you will not need to register for MTD on your VAT returns. However, if you are making more than £10,000 as a self-employed person then you will need to register for MTD for your personal income tax returns by April 2023.

Make tax returns easier with Countingup

We hope this article has cleared up any questions you might have about Making Tax Digital and VAT thresholds for maintaining your tax records.

By setting up a Countingup business current account, you can manage all your financial data in one place. The app comes with free built-in accounting software that automates the time-consuming aspects of bookkeeping and taxes, and it is Making Tax Digital compatible. 

You can view real-time insights into your business’ finances, such as cash flow and profit and loss statements. The app provides running tax estimates so that you always know how much to set aside for your tax return.