In an effort to make the UK’s tax system one of the most technologically advanced administrations in the world, the government is introducing its Making Tax Digital (MTD) initiative to bring tax reporting up to the latest standards. The benefits of the new system are designed to work two ways:
• Once any teething troubles are ironed out, it should make the process of reporting and paying tax much easier for businesses.
• Once the system is fully up and running, it should make the process of collecting taxes and managing tax affairs more efficient and effective for HMRC.
By 2020, all businesses will be required to manage their tax affairs digitally, using online accounting software to send accounting information to HMRC on a quarterly basis.
Tax accountants all over the country have been working tirelessly to advise businesses on how best to prepare for this new dawn of tax reporting. While all business taxes will eventually be covered by the scheme, Value Added Tax (VAT) is the first one to go live, starting on 1 April 2019! It is estimated that this will affect around 1.2 million small and medium sized businesses.
So, what exactly does this mean for business owners?
Put bluntly, it means that the way tax is reported and paid to HMRC will change irrevocably. If you are a VAT registered business, you will now no longer be able to keep manual VAT records but have to make all record keeping digital. Without wishing to overstate the impact of the new system, MTD in fact means the end of paper based accounting for millions of UK businesses.
Digital records are those that can be viewed on a computer screen on your desktop, laptop or mobile device. You can make data digital by scanning in paper records, or you can input data direct into digital format, such as via a spreadsheet, word processing document, accounting package or even email.
Obviously, the sooner your business makes the change to digital record keeping, using software that is compatible for HMRC tax reporting, the smoother and quicker the transition will be. This includes the major cloud accounting systems such as Xero, Quickbooks Online and Sage Business Cloud Accounting/Sage One. Those behind the curve, including sole traders and companies that are still using manual accounting systems or basic Excel records, are likely to experience most inconvenience.
Are all businesses affected by the tax reporting changes?
Businesses with a taxable turnover of more than £85K exceed the VAT registration threshold and will from now on have to keep their records digitally, using HMRC compatible software. Digital VAT returns are due to be submitted from 1 April 02019.
While the vast majority of UK businesses will have to comply with MTD rules as they are rolled out, there are some exceptions. Unincorporated businesses and landlords with gross incomes/annual turnovers of less than £10K will remain unaffected by the new digital tax initiative, as will businesses going through insolvency.
Further exemptions include groups of people that are unable to access digital tools or apps on account of their age, religion, disability of remote location. All exemptions are being considered by HMRC on a case by case basis.
How will MTD actually benefit small and medium sized UK businesses?
It is fair to say that the digital age is creating both opportunities as well as challenges for UK businesses, and accounting and tax reporting are a case in point. Making Tax Digital has to be a step in the right direction, producing three immediately obvious business advantages:
1. Digital accounting saves precious time. Reports can be created within a matter of minutes, meaning more timely access to real-time management information to enable you to make critical business decisions.
2. Scrambling around for receipts and invoices, reconciling files and ensuring spreadsheets are correct and up to date will become a thing of the past. With digital record keeping, all tax information and communications with HMRC will be in one place.
3. The ability to access HMRC’s income tax estimates makes cashflow forecasting much easier, while quarterly reporting ensures that bottlenecks are kept to a minimum.