Despite indications that most small businesses have been receptive to the changes, as many as one in 10 businesses1 missed the Making Tax Digital (MTD) deadline for filing VAT and, according to a YouGov poll, only 12% of business decision makers felt ‘very prepared’ for MTD.
If you’re a small business, you should be aware of Making Tax Digital. It forms a key part of the Government Transformation Strategy, which launched in 2017 with the vision of creating a ‘truly digital Britain’.
Designed to simplify tax, make the system more straightforward and give SMEs better control of their finances, MTD requires businesses with a taxable turnover of more than £85,000 to keep their records in a digital format and use MTD compatible software to submit their VAT returns.
Sounds simple, right? The results of the YouGov poll suggests otherwise!
Confusion around an overwhelming – and often perceived to be costly – choice of software solutions, alongside small businesses being unsure of what they need to do to comply, could have contributed to the deadline being missed.
HMRC are reassuring businesses that during this first year of legislation, no penalties will be issued to those who can demonstrate they are doing their best to prepare and adjust to the new system. However, it has been made very clear that fines will begin to be implemented from 2020, as the initiative continues its rollout.
So, what are the implications for your business and how should you prepare?
Who does MTD apply to?
MTD applies to a wide range of taxpayers, including most businesses, the self-employed, landlords and even individual taxpayers.
Exemptions are only made in rare cases, such as the following:
- You are unable to use a digital tax system due to your age or a disability.
- You live in an area which makes you unable to utilise the system, such as lack of internet access.
- You and any other members in your business object to computers on religious grounds.
- You or your business are subject to an insolvency procedure.
- Businesses with an annual income under £10,000 are also exempt unless they voluntarily opt-in.
Will I be penalised if I don’t comply?
In short, yes. Whilst HMRC are showing leniency during this ‘soft landing period’, from 2020 penalties will begin to be imposed for late submissions via a points-based system.
What are the benefits?
HMRC states that the aim of MTD is, “to make it easier for individuals and businesses to get tax right and keep on top of their affairs”. It should make tax administration more efficient and easier for us all, prompting clients to have a more proactive relationship with their accountant.
- Know where you stand
By accessing your digital account on the HMRC portal, you can see a complete picture of all your business’s tax affairs and manage them from one place.
- Save time
As the data is digitally linked, HMRC will collect and process it in almost real-time. There is no need to file everything separately, as a large portion of the process is done automatically.
- Plan and budget
Whereas previously you would have to wait till the end of the tax year to find out how much tax you had to pay, you can now view it in real-time. You can then budget accordingly, rather than setting an approximate budget based on estimations.
What about records?
All VAT-registered businesses with an annual turnover of over £85,000 will need to store their records digitally. This includes businesses overseas even if they do not have a UK establishment.
It is expected that you keep files available for up to six years. Paper copies will no longer be required, with scanned or photographed invoices permitted if they are clear and legible. However, as we move closer to the use of purely electronic documents, the need for printed copies will diminish, making this process easier.
Does this mean the end of annual tax returns?
Annual tax returns will be a thing of the past, with no set tax year to report on. Instead, you are required to update HMRC as a minimum on a quarterly basis to provide closer to live figures. Although reporting more frequently may sound like more work, the reality should be different.
Rather than building one large report encompassing an entire tax year retrospectively, MTD will involve live reporting on current numbers. Once the transition period is over and you have successfully set up your software and data with digital links, much of the reporting will be handled automatically - reducing the manual workload further and minimising the opportunity for human error.
What about VAT?
Reporting your VAT digitally has been mandatory since 1st April 2019. Any VAT-registered business with sales above the VAT threshold of £85,000 have had to file their VAT returns using MTD-compatible software. The original VAT portal will remain open, however, to allow the filing of VAT from those who are exempt. If you are registered on a VAT special scheme such as the flat rate scheme, you are still required to report it using compatible accounting software, though your eligibility and scheme will remain the same.
What are ‘digital links’?
HMRC defines a digital link as one where a transfer or exchange of data is made electronically between software, without the requirement or involvement for manual intervention. Essentially, your digital tax software needs to communicate its data automatically with data sets, to achieve live reporting.
This allows for transactions to be traced from source data, such as purchase and sales ledgers, all the way through to VAT return completion and sending to HMRC. Currently in a ‘soft landing period’, HMRC will allow businesses a period of time to put in place links between compatible software, but this will become mandatory from 2020.
Will I need to purchase software?
HMRC is not providing its own software but will ensure basic apps and software products are available for all businesses. Details of MTD-compatible software products are available on https://www.gov.uk/.
How will I know what’s compatible?
There are a wide range of options available, but our advice is to use software recognised and approved by HMRC. We recommend using one of the main providers of accounting software, such as:
These are already well established, widely in use and are all compatible. Additionally, we are certified software partners for all the above and can provide help and support.
At the heart of the MTD scheme is the ambition to make tax reporting simpler and more efficient. As Chris Evans, VP and UK Country Manager at Intuit QuickBooks comments: “Adopting digital tools is essential for any business looking to grow and succeed in the modern world…the transition to digital has already led to tangible benefits for some businesses, such as streamlined operations, simplified tax and enhanced cash flow management.”
So, don’t get left behind. If you feel unsure about what is expected of your business or want to check you are compliant, simply get in touch and let us guide you through.