Making Tax Digital – what’s it all about?
First mentioned during Budget 2015, Making Tax Digital – a government plan to transform how people and businesses pay tax – has been a long time coming. Of course this is no surprise; we all know politicians are often tarred with the overpromise-and-under-deliver brush, so the initial estimate of rolling out a nationwide fully digital online tax system by 2020 was wildly ambitious. In their defence though, the entire world it seems has been pretty preoccupied with Brexit (sorry, won’t mention it again) for what seems like a gazillion painful years and thorough testing has needed to be carried out to ensure the shift from pen, paper and post is as smooth as possible. So, what is Making Tax Digital all about and what do business owners need to do?
HM Revenue & Customs (HMRC) have long had a vision of becoming one of the most digitally advanced tax administrations in the world, and Making Tax Digital is a fundamental part of the overall plan to make it easier and more hassle-free for both individuals and businesses not only to get their tax correct, but also to be able to manage their day-to-day accounting as simply as possible. The legislation is an attempt to do exactly as its name suggests – instead of filing one document to HMRC each year via a flurry of forms, receipts and documentation (an arduous task to the less number-oriented among us), businesses will be required to keep electronic records of their accounts – using HMRC Making Tax Digital approved software – and then file their tax information digitally, on a quarterly basis.
Once Making Tax Digital is fully implemented, business owners will no longer be able to manually pay tax via form filling and post – a process that is estimated to be responsible for over £9 billion worth of tax somehow ‘disappearing’ every year simply down to human error.
So, what does this mean for the businesses affected by the new rules? Making Tax Digital for VAT (the first phase of the grand MTD plan that will eventually branch out beyond VAT once the system has been shown to work) came into force in the UK on 1st April 2019. In a nutshell, the new legislation requires VAT-registered businesses with annual VAT-able sales of over £85,000 to keep all records necessary for VAT purposes online, and to use MTD-compatible software to submit their VAT returns. And yes, this does mean updating your bookkeeping processes and getting to grips with some new technology, but don’t panic – the software programme has been designed with ease of use in mind and there are lots of different options available; which one is best for you will depend on your business.
The first year of MTD extends until April 2020, during which time HMRC have declared a ‘soft landing period’, meaning that if your business is affected by MTD, you have until April 2020 to create a digital link between the software that currently holds your accounts and HMRC. If you don’t yet have a digital link, you won’t be penalised during the soft landing period, and neither will you be reprimanded for late filings or record-keeping errors, but only if you’re seen to be doing the best to comply with the new legislation by following the relevant steps after signing up for MTD initially.
The only grey area here concerns whether you’re exempt from paying tax online as some people, either due to disability or poor rural connectivity currently are; in this case, a claim must be presented to HMRC for the continuation of manual submission. The onus is very much on the business, however, to justify why they are deserving of an exemption and HMRC reserve the right to challenge their reasons too, so there are very few businesses that will find themselves exempt from online filing requirements. Where poor connectivity is concerned, we can only presume that this is part of the government’s existing preoccupation with strong broadband throughout the UK being a priority going forward into 2020; it’s becoming ever more important, particularly in line with the future vision for MTD, so is likely to be rectified as soon as Brexit (dammit, sorry) is dealt with.
Now the practicalities are dealt with, let’s look at five reasons to celebrate MTD:
Privy to an online tax account that they can access at any time of day or night, business owners will be able to see all of the information that HMRC hold about them meaning pointless resubmitting of data will become a thing of the past, up-to-date details can be checked at any time, and even more efficient tailor-made services can be identified for every type of business.
Wave goodbye to lengthy and frustrating on-hold waits while trying to get through to HMRC on the phone; using MTD means you can reach an advisor on the website via webchat and secure messaging. Being able to send and receive information using software also means business owners can interact with HMRC at a time that works for them and not only during standard office hours.
Business owners will no longer be required to search around for bank and other financial, legal or governmental information as HMRC will be able to access it (where permitted/relevant) at the touch of a button, making the whole process far easier and less time-consuming for the taxpayer.
Using a digital tax system not only means HMRC will take receipt of and process tax information in real time, and so prevent errors and reduce repayments and/or owed tax building up, it also means business owners can keep track of their figures and won’t have to wait until the end of the year to find out how their tax bill is shaping up.
Scope for growth
Use of the MTD accounting software makes the process of chasing clients for missing information easier, so accountants have more time to work out what’s best for your business in terms of growth. Having access to accounts data throughout the year, as opposed to once a year before an annual return, also means advisers have instant access to essential information that can help identify how their clients can become more profitable.
For HMRC’s official line on all things MTD, head to www.gov.uk/government/publications/making-tax-digital/overview-of-making-tax-digital.