What is Making Tax Digital?
Making Tax Digital is simply what it says on the tin. Instead of filing one document, once a year, small businesses will have to keep electronic records of their accounts every quarter, followed up by a year-end submission (that you’d normally produce) using HMRC approved software.
In theory, it’s easier all round. Businesses are forced to keep better records and HMRC can track what taxes are coming through with greater ease.
When is the start date?
From April 2019, businesses with a turnover above the VAT threshold will be required to submit quarterly VAT information in this way. If your VAT quarters are not in line with the business quarters you will therefore have to file the two reports separately. Totalling eight submissions a year direct from your bookkeeping.
All businesses with VAT quarters ending on the last day of March, June, September and December will be required to comply with MTD regulations from 1st April 2019, with your first submission on 31st July 2018. But they are yet to announce if the current ‘7-day grace’ for online VAT filing will be continued under the MTD system.
Those with a 30th June 2018 year end will need to decide about what MTD-compatible accounting software they are going to use, or face the complication of changing their accounting software half way through their accounting year.
By April 2020, HMRC will widen the scope of Making Tax Digital by including taxes for sole traders and partnerships and corporation tax for Limited companies. This means all small businesses will brought into the system during the 2020/21 tax year.
Will I have the stress of submitting my tax return four times a year?
The answer is simply, no. Yes, you will have to update your tax records quarterly but this is not the same as filing four separate tax returns. In fact, you should be less stressed.
Most people dread completing their tax returns because they leave it to the last minute, with mountains of receipts and invoices to work your way through. Frankly, it’s a nightmare.
But with quarterly updates, you’ll instead update your figures throughout the year, reviewing your data and confirming that it’s accurate - so you won’t have that mad rush at the end of the year trying to get organised and on top of your books.
Does this mean I’ll pay more tax?
No – you’ll still only be paying tax once, at the end of year. But using MTD software, you’ll be able to calculate your tax bill throughout the year and save accordingly. This means you’ll be more organised when it comes to the end of year tax returns.
HMRC do also have an option for businesses wishing to pay income taxes quarterly. You still won’t be paying more tax, but you can spread the costs across the year.
Can I still use spreadsheets?
You will still be able to continue using spreadsheets for record keeping, but you must ensure that they meet the requirements of MTD. This will involve combining spreadsheets with software. You will need to find an integration tool which can push the required data from the spreadsheet into a cloud-based accounting software, like Xero, which naturally links to HMRC’s system (also known as api). This will however come with an added cost for subscribing to the software and a substantial amount of your time in changing your formatting to match this.
Or you can, of course, just convert to a cloud-based software. It needn’t cost you a fortune, in fact many of our clients have moved from spreadsheets to Xero, which has proved to be easier and faster to use. In fact, we suspect that overall Xero will be cheaper to run than spreadsheets in terms of software linking and your time spent.
HMRC have said that they may provide a free, basic software and there are plenty of low-cost options on the market, but we are yet to test a version that is any good!
What are the concerns?
• More data will be passed to HMRC throughout the year than ever before
• Any planning you do should be done throughout the year – big year-end adjustments are not going to look good anymore!
• You will have to keep up-to-date and accurate records
• You will want to know what you are sending to HMRC – at year-end we check over all the disclosures we make and think about how HMRC may view them. If you are submitting direct from the bookkeeping, HMRC could see this without our vetting
So, how will this benefit me?
• Access to your tax information in real time
• All tax information and interactions in one place
• Less form filing
• Communication with HMRC will be easier than ever – with both the business and HMRC having a complete overview of all taxes in one place
• Keep up to date with your business performance
• Informative business decisions can be made
• You can budget better for upcoming tax liabilities
Making Tax Digital is coming. It’s a fact. But we still have time to prepare for the changes it brings. After the initial transition period, chances are that MTD will have profoundly positive impact on small businesses in the UK.
We can help you smooth out the process so it’s less stressful for you and you start to see the benefits of Making Tax Digital weigh in.
For more insight and the practical steps you can take, see our blog posts on MTD or better still, give us a call.
If you want things clearing up a little more, we asked A4G's Cloud Accounting Experts Joe and Luke to give us the lowdown on Making Tax Digital, and answer some of your frequently asked questions.
See what they have to say in the video below.