Making Tax Digital (MTD) is coming to the UK in April, and it’s set to transform the way taxes are managed and filed through HMRC (the government department responsible for their collection). So now is the time to find out if and how MTD affects your small business, and what you or your accountant need to do to get ready.
What is Making Tax Digital?
Making Tax Digital is an HMRC initiative designed to make the UK tax system more efficient and effective. It will do this by replacing the manual process of submitting your tax records with an integrated system that does it for you automatically. Businesses will be asked to store and submit their tax records using MTD-compatible software (which we’ll come to later), and will no longer use Government Gateway for tax filing.
Why is it happening?
It’s easy to make errors when a year or more’s worth of financial data needs to be organised and submitted. The risk increases when businesses go without any of the digital tools designed to consolidate and simplify the process. When UK200, the UK’s leading association of independent chartered accountants and law firms, surveyed its members on their approach to tax, they found that:
- 65% of those members’ SME clients didn’t use software to keep tax records
- 50% used manual records or spreadsheets
- 16% used a shoebox
Making Tax Digital encourages companies like these to be more digitally-minded, reducing the chance of information being lost and errors being made. The knock-on benefits of this for small businesses are huge. According to Business Advice UK, small businesses lose three working weeks and about £5,000 to tax compliance every year. This is time and money you can’t afford to be without, and with the shift to MTD, the hope is that you can win them back.
The new digital system will also impact the UK in a broader sense. Mistakes cost the government over £9 billion a year, according to HMRC. Add the £15 billion lost to tax fraud, and you start to see a sizeable tax deficit. This has a knock on effect for everyone as services like education and transport receive less funding. By simplifying the process, and making it harder for fraudsters to abuse the system, the government hopes there will be fewer losses.
What types of business does it affect?
Making Tax Digital will be limited to VAT filing for the time being. This means that from April 2019, UK businesses with a taxable turnover above the VAT threshold of £85,000 will be obliged to submit their VAT records to HMRC using MTD-compatible software. Companies in HMRC’s deferral group don’t have to enrol until October 2019. You can see what types of company fall into that group here.
Corporation Tax, NI and Income Tax will be added to the MTD initiative from April 2020.
What are businesses required to do?
Now to the part you’ve been waiting for. We’ve broken down everything you need to do if your business is VAT-registered, or if you think you’ll exceed the £85,000 threshold in the next 12 months.
Choose MTD-compatible software
The type of software you should choose is affected by whether you as the business owner, or an agent, manages your business’s tax. If it’s a financial agent or accountant making the selection, get them to involve you in that process — platforms have various different benefits and price points to suit different businesses.
HMRC has created a list of compatible platforms for both businesses and agents. There is also a list of platforms in development, i.e. platforms that HMRC is reviewing and trialling for their compatibility.
Create a Making Tax Digital account
Next, you need to sign up for an MTD account, which will allow you to link your software with HMRC’s systems and receive extra help on going digital.
You can sign up for a Making Tax Digital business account here. Or if a financial agent manages your records, they can sign up here.
Authorise your software
Once you’ve got your software and Making Tax Digital accounts set up, simply authorise the software. This connects the two and gets you fully ready to send your VAT returns digitally.
How will businesses manage tax from now on?
Making Tax Digital will eventually phase out all existing manual and paper-based systems by 2020, replacing them with a process that uses your MTD-compatible software to:
- File digital records (business information and records of services/products supplied or received, such as online invoices and sales data)
- Track the tax you owe
- Send quarterly tax data to HMRC
- Send an end-of-year statement to HMRC (most software will do this and the quarterly update automatically)
This new process means that business owners will need to stay on top of collecting digital records day-to-day. Integrated payment systems like Square are designed to take care of this in the background by consolidating sales data from all areas of your business. With a bakery for example, Square’s point-of-sale app would collectively save all records for goods sold in-store, large orders paid for via invoice and any payments taken over the phone.
Xero, Zoho Books and CommerceSync (which connects to QuickBooks) are online accounting platforms compatible with both Making Tax Digital and Square. This means, for example, that if you take payments using Square Reader or Square Invoices, all the necessary data for these taxable transactions will automatically be synced to the software, ready for VAT filing.
The shift to MTD might seem especially daunting if you’re a cash-only business, but the first step towards going digital is easier than you think. Speak to our sales team to find out more.
This article is intended to offer helpful guidance and does not constitute qualified financial or tax advice. Please consult an accountant or financial advisor if you have any questions pertaining to your business and make sure you keep up to date with HMRC announcements.
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