“Making Tax Digital”, or “MTD” as it’s more commonly referred to, is a term most small business owners will probably be familiar with. However, they may not fully understand how it will work, when it’s being introduced or what impact it will have on their business. Hopefully this article will answer those questions.
“Making Tax Digital”, for the unfamiliarised, is a government driven initiative to digitalise all things tax. HMRC will be asking for information in “real time” through portal-type software, so when the time comes, passing your accountant a stack of receipts and invoices once a year isn’t going to cut it.
This has been met by many business owners with a wave of doubt, fear and hysteria and with good reason; if you’re systems aren’t set up for it, things are going to get tough. For those of us running our businesses on the cloud, there are murmurs of quiet optimism. HMRC may not be known for their efficient implementation of big projects but if they can nail this it could make the task of submitting tax returns a breeze.
First announced in the 2015 Autumn statement, the initiative is a huge undertaking aimed at simplifying and modifying the way Her Majesty collects her revenue. However, this modernisation comes at a price; the ICAEW estimates the total cost to SME’s could reach up to £7 billion. With frightening numbers like that being thrown around, you may be asking yourself why I’m approaching the initiative with an air of positivity.
The answer is simple; the software that will be required to streamline the new MTD reporting requirements will also help to streamline your internal business processes so why not embrace it. The world is digitalising and MTD might give reluctant business owners the push they need to get onboard.
When is it being introduced?
Initially, MTD was due to hit all business’s that were VAT registered and had turnover above £85,000 from April 2018 with the rest of us coming into the fold in the two years that followed. However, with strong opposition to this timeline from just about everyone outside the government, the initiative has now been delayed to April 2019 and will initially only apply to VAT reporting. There is no set date for when income tax, national insurance or corporation tax will utilise the system or when businesses with turnover below £85,000 will be included but April 2020 is the earliest date being considered. You still have plenty of time but now is the time to be pro-active.
How will MTD reporting work?
In the current environment, taxpayers update HMRC annually (with some notable exceptions) at the end of the accounting period. MTD will shake things up requiring returns to be made on a quarterly basis or for those that wish, even more frequently.
Although this may sound like more admin, MTD should actually reduce the burden on SME’s. The number of returns may be greater but the information required will be simplified. The government will draw information from other sources such as bank feeds and information already provided through PAYE to help populate returns. It remains to be seen exactly how this will work but to be honest this should have been happening years ago.
As MTD will bring in an era of quarterly returns we should see the end of year end returns as we know them for unincorporated entities, namely sole traders and partnerships. Limited companies and LLP’s are still going to have to submit an annual corporation tax return but it’s quite possible these will be partially populated by information submitted during the year.
What are the drawbacks?
Although the government are yet to confirm this, MTD is a push to get taxpayers to pay their tax earlier. Declaring how much tax you owe in real-time is pretty much guaranteed to be a precursor to paying tax in real time. For some business’s, this could have a big impact on cash flow so although it’s a way off, it needs some consideration.
Many will view the cost and time of implementing a new accounting system as a major drawback. However, as I alluded to earlier, modernising the accounting system that drives your business will provide synergies and who doesn’t love synergy. It really is an example of short term pain for long term gain.
What to do
Put simply, you need to be prepared. If you wait until MTD goes live to implement a strategy, you are going to face some major issues. If you’re already using a cloud-based solution that’s a good start. HMRC have stated your accounting software will have to be capable of “talking” to HMRC’s system so spreadsheets probably won’t suffice. If you’re still using excel, now might be a good time to start looking at a cloud-based solution.
MTD is coming so don’t bury your head in the sand. Start planning today for how Making Tax Digital can benefit your business rather than hinder it with these tips:
– Get a cloud-based accounting solution and use this to streamline the processes at the core of your finance function.
– Contact a professional – there are a number of solutions all of which have benefits and drawbacks. Speak to someone to see which package is the best fit for your business.
– Keep up to date – Further announcements could drastically alter the landscape described above. Know what’s happening and when.
Need a hand?
We love talking about all things tax. If you’re interested in implementing software and processes to be best prepared for Making Tax Digital or want to discuss anything else please get in touch.
At Leap Accounts, we’re available to help with any accounting or taxation issues your business is facing. Join the new-age of business advisory services; with cloud-based systems as standard and a forward-looking attitude you’ll get the value you deserve from your accountant.
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