Are you prepared for Making Tax Digital?
Upcoming legislation on submitting tax returns is approaching, but is your business prepared? A recent survey carried out by a leading online accounting software company found that as many as 41% of small business owners are still unaware of Making Tax Digital.
What is Making Tax Digital (MTD)?
Making Tax Digital (MTD) is an ambitious initiative by HM Revenue and Customs to modernise the UK tax system by 2020 through enhanced use of digital data, with the ultimate aim of becoming the most efficient tax authority in the world.
Under the proposals every business, charity and individual will have a digital tax account, bringing together each taxpayer’s details in one place. A lot of information will be automatically uploaded to the account by banks, pension providers and government departments. The proposals will also require most businesses to submit financial information to HMRC on a quarterly basis.
It is proposed that most businesses, including companies and charities, partnerships and individual tax payers who are self-employed and some that are letting out property, will be required to keep their records in a digital format and submit them to HMRC using MTD compliant software.
These changes clearly impose a substantially increased administrative burden. The elevated frequency of reporting will require additional services from your accountant or in-house team. The flip side of this is that MTD also help provide your business with a better understanding of the financial position.
While it will create a challenge for many, MTD will also bring significant benefits in the longer-term to businesses, including improving their decision-making process through more accurate and up-to-date information. There will be a better understanding of tax liabilities and therefore should eliminate any surprises. Smaller firms will be obligated to commit to either up skill digitally, or require greater reliance on support from external accounting practices.
The Making Tax Digital Timeline:
- April 2018 – MTD for VAT pilot started.
- April 2019 – MTD for VAT starts. All VAT Registered UK Businesses with turnover above £85,000 are required to keep records digitally and submit VAT Returns using MTD compliant software.
- April 2020 at the earliest – MTD for Income Tax and Corporation Tax will commence
While the initial Making Tax Digital deadline of April 2019 targets roughly 2.55 million larger businesses with turnover over the £85,000 VAT threshold, smaller businesses will eventually also have to follow suit.
What do you need to do to get ready?
If already using accounting software, then you will need to check that your software provider will be upgrading their products to make them MTD compatible.
HMRC will only accept VAT returns provided by a software package supporting Making Tax Digital for VAT.
Currently over 150 providers such as Xero, QuickBooks, Sage and FreeAgent are working closely with HMRC to have their MTD functionality ready for April 2019 and we would advise that you ask your accountant for advice on the best product for your business.
Most companies will fall somewhere between the two extremes of still keeping all their records on paper and having a fully MTD embraced accounting software package that is already used.
At present 99% of VAT Returns are filed online with HMRC however; only 15% of those are filed directly through accounting software. Manually entering your VAT figures into the existing HMRC portal will not be MTD compliant.
Our advice for all VAT registered businesses with turnover above £85,000 is to start preparing now and move over to a digital cloud-based platform. This will allow time to iron out any issues and for any software conversions and internal training to be undertaken prior to the deadline.
If you currently maintain records on paper your processes will need to change. You will either need to engage an accountant to manage your bookkeeping and quarterly reporting or acquire the appropriate software to do this yourself.
Many accounting practices, such as ourselves, work in partnership with leading software providers and are therefore able to offer discount on the RRP for you.
We spoke to other firms regarding this. Robert Caron, Principal at Tenor Tax LLP claims “ most accounting firms are adopting paperless workflows. With open office layouts and remote work becoming the norm, even if paper documents make their way to your accountant, they’re going to be scanned and shred, at your expense, before any work takes place. With most publishers making their tax preparation software accessible through a web browser, there are big incentives to keep the tax workflow in the cloud.”
So how is all of this going to benefit you?
While MTD sounds like a burdensome process to get started there are many benefits to quickly be realised. Firstly, seeing your tax balance before year end will help to prevent errors and stop tax due or repayments owed building up to a lump sum at a later stage. This allows key personnel to act upon any potential problems immediately.
A central system will also provide transparency of data held on either you or your business and allows you to see all your tax information in one place – and will include all your liabilities and entitlements.
As all information is stored in the cloud there is no need to worry about data going missing or files being lost or damaged. It also means you can access your tax information from any device and be able to logon wherever and whenever you like, hugely benefiting businesses and individuals alike and allowing them to get a better grip on their finances.
Nicholas G Muscat of AussieMoneyMan, says: “Tax is going digital because, simply, everything else is. This will be beneficial as it will allow for faster, paper free tax documentation. I think we can expect a more seamless and fast means of doing tax.”
Where to go from here
Once your finances are completely digital you will be better placed for ensuring compliance with HMRC once the deadline arrives. Your accountant will need to start taking steps to prepare you for the possible disruption that MTD may cause ¬– playing a key role in helping businesses understand the MTD initiative.
If you need further advice on Making Tax Digital in relation to your business, or help identifying the best online software for your needs, contact Andrew Kershaw for more information. We can offer ongoing support, advice and training to help make the switch to Making Tax Digital as smooth and seamless as possible.