What is Making Tax Digital and how does it affect my business?
Making Tax Digital (MTD) is set to drag the tax system into the 21st century come April 2019. From this date, businesses with a turnover above the VAT threshold (currently £85,000) will have to file their tax return online using digital software in a bid to make the administrative process more efficient, more effective and to also ease compliance.
With digital technology and cloud accounting being at the heart of everything we do as a firm of accountants, we welcome the move digitising the tax system.
As we mentioned in our previous blog, “3 business lessons we took away from Xerocon 2017”, the exponential rise of digital technologies is happening now. It’s highly likely that even the most complicated processes that have previously only been possible by human hands, can and will be done by machines. With this in mind, Making Tax Digital pretty much sparks the end of the annual tax return.
What is the timetable for Making Tax Digital?
With only 11% of businesses using accounting software to file their tax return, there were concerns that the roll out of MTD was too aggressive. After initially proposing the switch to digital tax records for businesses would take place as early as April 2018, HMRC announced that they would re-phase the roll out and the timetable of their Making Tax Digital initiative as follows:
- April 2019 businesses with a turnover above the VAT threshold will have to file their tax return online using digital software
- From at least 2020, businesses will be required to submit quarterly digital records to HMRC for other taxes
- Unincorporated businesses with annual sales between £10,000 and the £85,000 VAT threshold would be given an extra year to prepare for Making Tax Digital.
Who is exempt from Making Tax Digital?
HMRC recognises that there will be a small minority of people who will be unable to use digital accounting software. Their exclusion from the Making Tax Digital initiative could be for reasons of:
- Based in a remote location
If you fall into one of these categories, you will be able to submit your financial data over the phone or nominate a proxy – such as an accountant – to submit the data on your behalf. Unincorporated businesses with an annual turnover of less than £10,000 will be excluded from being legally obliged to file digital tax returns. Equally, charities will also be exempt from MTD, however trading subsidiaries of charities will have to adhere to these new changes.
Making Tax Digital FAQs
Q. Why is HMRC making me file my tax return four times a year?
Don’t worry, they’re not! You’ll be required to update your tax records four times over the year, however this is not the same as filing a tax return. It will simply be a case of updating data as you go and making sure that the information you’re updating is correct.
Q. Will I have to hire an accountant?
The short answer is no. However, as accountants, our job will be to help plan, forecast and strategise our clients’ business affairs in a responsible and tax efficient manner. The MTD interface should be relatively straight forward, although if you’re unfamiliar with cloud accounting software, we’ll be able to help you get accustomed.
Q. Will I have to spend a fortune on software?
No! There are a lot of competitively priced cloud accounting software programs on the market – our particular favourite being Xero. Software providers such as Xero are currently working in partnership with HMRC to ensure that the transition to Making Tax Digital is a smooth process by incorporating the facilities to comply with MTD within their software.
If you’re yet to embrace digital accounting software out of fear, you shouldn’t worry. Accounting processes will become far easier and faster, so much so that you will have wished you moved to cloud based software sooner.
Typically, as with any new initiative or change in legislation there is a fair amount of scaremongering around what businesses will have to do in order to be compliant – some of which is coming from accountants! The fact of the matter is that Making Tax Digital will be a very positive step towards making businesses more productive in the UK. Accounting software company Freeagent have bust other myths surrounding Making Tax Digital.
If you’re unsure about how you will be affected by Making Tax Digital or you want to start preparing for the changes that will come into effect in April 2019, feel free to get in touch by speaking with one of our advisors.