There is a lot of talk around Making Tax Digital (MTD). Is it really happening? The short answer is ‘yes, absolutely’. First announced in the 2015 Budget, MTD (Making Tax Digital) is the government’s aim of achieving a fully digital online tax system and has been constantly evolving since its inception. This is brief guide on how your company will be paying tax in the future.
It was initially scheduled to happen by 2020 but the government has acknowledged the need to adapt timelines based on testing – so businesses will ‘be able to move to keeping digital records for tax at a pace that is right for them’.
Once it’s in place, business owners will no longer be able to manually pay tax via pen, paper and post – a process that HM Revenue & Customs says causes over £9bn worth of tax to be “lost” every year due to human error. ‘Manual’ input also includes inputting the figures yourself using your Government Gateway account.
HMRC estimates that MTD will contribute over £1bn to the Exchequer by 2022/23, and its ambitious aim is to become ‘one of the most digitally advanced tax administration in the world’.
What will it mean for my business?
From April 2018, the government began live testing of the system which will allow some small business owners to keep online records of their income and expenditure for Income Tax purposes, and send quarterly updates to HMRC via their payment software or app. HMRC requires online records to be kept in ‘functional compatible software’, such as cloud-based packages from QuickBooks, Xero, Freshbooks etc. The complete list of HMRC-approved software can be found here.
In order to facilitate this trial period, HMRC have approached accountancy bodies such as Coult & Co with an invitation to put themselves forward and opt-in for taking part in the trial. Businesses cannot put themselves forward for the pilot.
From 01 April 2019, MTD will force VAT registered businesses* to keep VAT records online, and to provide their VAT return information to HMRC through compatible software such as those mentioned above and others you may have seen advertised recently. Businesses already using MTD-compliant software should see no change to their procedures during this period. HMRC are regularly adding software providers to their list of accredited and recognised software.
However, businesses that may presently keep their records in a cashbook, offline spreadsheet or non-MTD-compliant software, will need to make changes as the ability to login to HMRC’s website and manually key-in the VAT return figures will be removed for businesses with a turnover greater than £85,000.
Making Tax Digital will also be voluntarily available for other businesses for VAT, Income Tax and National Insurance contributions during this period. Though not a legal requirement for many, it’s hoped by HMRC that lots of these businesses will choose to use these new digital options from the April 2019 roll out.
You don’t need to wait for Making Tax Digital to apply to your business; you can voluntarily comply with Making Tax Digital for VAT from April 2019, if you wish. There are advantages to getting ahead, particularly if you have to change your bookkeeping processes and need time to get to grips with new software.
Changing software mid-way through an accounting period can be messy and isn’t recommended, so it’s best to plan ahead for Making Tax Digital.
*MTD for VAT will not be mandatory where turnover is below the VAT registration limit, currently £85,000 per annum.
When will it be fully implemented?
The government has stated that it will not widen the scope of Making Tax Digital for business beyond VAT before the system has been shown to work well. It is then expected that the full system will be rolled out from April 2020, although this date is fluid given the Brexit timetable taking priority for many government departments for the next couple of years, and many government staff being told to put their usual duties to the bottom of their work pile.
This means that many businesses will breathe a sigh of relief as this gives more time to plan, upgrade software as needed and focus on business in general. HMRC will use this period to continue rigorously testing the system by expanding the current pilot and carry out further consultations.
What are the business benefits of Making Tax Digital?
More transparency: Having an online tax account which they can access at anytime, business owners will be able to see what information HMRC holds on them, and as a result, won’t waste time re-submitting it to accountants or requesting it.
Real time data: Business owners will no longer have to wait until the end of the year to find out how much tax they have to pay. With a digitalised tax system, HMRC will collect and process tax information in real time to help prevent errors and stop ‘tax due’ or ‘repayments owed’ building up and business owners having a shock when it comes to paying what is due.
Online banking: Much like the online account you have for your own bank account, by 2020, business owners will be able to view liabilities and entitlements as a single financial account all merged in one place.
More flexibility: Being able to contact HMRC on its website via live webchat and secure messaging, as well being able to receive and send data via whatever payment software they use, business owners can interact with HMRC live at a time convenient to them.
What do I need to do next?
Ultimate responsibility lies with you as an individual or business to take the first steps to adapt for MTD. If we already handle the filing of your quarterly VAT returns then little, if any, changes need to be made from your end. We already use dedicated agent software for accounts file live VAT returns and you can continue sending us documentation an information in the format you already use.
Since Making Tax Digital was first announced, we have adapted our systems and processes to ensure that we are ready for service going live including by enrolling in the Xero Partner Program where we can offer you Xero software for a heavily discounted cost.