Making Tax Digital - What you need to know
If you’re a business owner you have most likely heard those three words thrown around more and more – Making Tax Digital. But what does it mean for you and your business?
In 2014, Conservative MP and Chief Secretary to the Treasury David Gaulke announced plans to eliminate unnecessary time delays when reporting to HMRC. The intentions is to put an ‘end to the tax return’ and implement a fully digital tax system. What this means for business owners and the self employed is that if you currently rely on manual bookkeeping, you’ll be in for some big changes.
You’ll be expected to move your bookkeeping onto cloud accounting software and submit your tax information quarterly via the accounting system (as opposed to using Government Gateway).
Sole Traders, Landlords and Partnerships will be expected to be on board with making tax digital by April 2018. As it stands, an exemption has been proposed for businesses with a turnover of under £10k, however this has not been solidified and is subject to change. We have been promised a decision on this by July of 2017, so keep your eyes and ears open for more on the matter.
Limited Companies have a little longer to prepare for making tax digital – they’ll be expected to move onto the system by 2020. Again, there may well be a 10k turnover based exemption and we’ll need to wait for confirmation of this. As of April 2019, VAT registered businesses will be expected to submit their VAT returns through cloud accounting software instead of through the Government Gateway website.
So how will Making Tax Digital affect your business? Well, it’s going to depend greatly on the systems you already have in place. If you’re VAT registered and already use cloud accounting software (such as Xero, Quickbooks, Freeagent or Sage One) you should find the process relatively smooth. You already have a bookkeeping system in place that can deal with the new regulations and you (or your bookkeeper) is already well used to submitting quarterly. If you are currently using spreadsheets for bookkeeping purposes, you may be in luck. It has been announced that they may be permissible under MTD – however it’s likely you’ll have to completely reformat your sheets in order to be compliant. Perhaps it’s time to make the jump to cloud accounting anyway?
If you’re still using ledger books, you’ll need to move onto cloud accounting software (or permissible spreadsheets) to comply with MTD. However, if this is the case, you’re likely what HMRC has referred to as a ‘Straightforward Taxpayer’, and as such will be entitled to free software to help you with the transition. You’ll fall into this category if you are not VAT registered, you’re not a Limited Company and you aren’t registered for PAYE.
There's no doubt that concerns have been raised about Making Tax Digital. HMRC and Making Tax Digital have been criticised by regulatory accountancy and bookkeeping bodies, along with the House of Commons Treasury Committee. The main concern seems to be the limited timescale in which the changes are expected to take place. There remains little clarity on turnover exemption, and it has yet to be confirmed whether or not a deferment period will be in place to allow small businesses more time to adapt to the changes.
We do know that heavy penalties have been proposed for non-compliance, but we don’t know any more than that about the penalty regime – including whether or not there will be any leniency during the transition period.
The difficulty for businesses is that with the limited and changing information released so far, the details and hard facts of MTD are still very much up in the air. As such, it’s difficult to give precise advice on what to do to ensure you’re ready for the changes. We can say this though;
Even if you’re already using cloud accounting software, talk to your bookkeeper and accountant about the upcoming changes to ensure you’re on the same page.
Keep abreast of new information about the scheme, and bear in mind that it’s not just new details being released – there may also be substantial changes to what has been previously announced.
If you’re looking to make the move over to cloud accounting in time for the changes, this process is most straightforward at Year End. Speak with your bookkeeper or accountant about what packages they specialise in, and ensure that whatever you pick suits your business. Xero, Quickbooks etc. will offer you a free trial of the software and it will be worthwhile making the most of this to familiarise yourself with the capabilities and feel of each option.
We’re all hoping the process will be as painless as possible, but it’s not enough to keep your fingers crossed (or worse – to bury your head in the sand). Stay informed and be prepared – you’ll be fine!
Michelle Smith, ValueAdd Bookkeeping & Business Support