Making Tax Digital (MTD) is a government initiative designed to bring tax reporting up to date and make the UK’s tax system one of the most digitally advanced tax administrations in the world. It means the way businesses report tax will change.
The majority of business owners will have to maintain digital records using software that is compatible for reporting to HMRC. Businesses with manual accounting systems or those using Excel to maintain accounting records will be most affected.
All business taxes will be covered under the scheme. However, only VAT has been given a roll-out date, which is set for April 2019. The remaining tax reporting to HMRC will follow from 2020 at the earliest. Online business advice experts estimate that approximately 1.2m small businesses in the UK will be affected.
There are thousands of accountancy practices helping small businesses prepare for MTD. They are recommending that the sooner businesses convert to digital record keeping the smoother the transition will be for digital tax reporting.
“The Digital Tax system will make it easier for businesses to ensure their tax is right and reduce avoidable errors. Digitalising the routine task of tax returns will save businesses time”– Numeric Accounting, Salisbury.
Why is “Making Tax Digital’ being introduced?
The ‘Making Tax Digital’ scheme has three main aims:
- To make it easier for businesses to report and pay tax
- To make HMRC more effective at collecting taxes
- To reduce HMRC’s overheads for managing tax affairs
What does it mean in terms of day-to-day business
MTD will change the way your business pays its taxes to HMRC. Businesses within the scope of the MTD scheme will no longer be able to keep manual records. If your business is VAT registered you have to make all record keeping digital. If you aren’t VAT registered digital record keeping is optional.
MTD means the end of paper-based accounting for millions of businesses across the UK.
What exactly are digital records?
Digital records are records that you can view on a computer screen, whether a desktop, laptop, tablet or mobile phone screen. Digital data may have been scanned from paper records or it may be digital-born, which means it was originally created in digital format (such as word documents, spreadsheets, presentation slides and emails). Cloud accounting software is a wise investment for a smooth transition to digital tax reporting.
Does Making Tax Digital apply to all businesses?
No. HMRC has confirmed an exemption from MTD for unincorporated businesses and landlords with a gross income/annual turnover below £10,000.
There are also a few groups for whom the new digital tax initiative will not apply.
HMRC recognises that there are a minority of people who can’t access digital tools so is legislating for exemptions, which will include people who can’t access digital accounting tools or apps because of age, religion, disability or due to the remoteness of their location. Exemptions are being considered on a case-by-case basis. Exemption also applies to businesses going through an insolvency procedure.
When will my business need to comply?
For now businesses whose taxable turnover exceeds the VAT registration threshold of £85,000 will need to keep their records digitally using compatible software. These businesses will need to submit digital VAT returns from 1 April 2019.
Some businesses with more complicated issues have been given a deferral until 1 October 2019.
Is Making Tax Digital a good or bad thing for my business?
The digital age brings both challenges and opportunities to businesses, including in the realm of accounting and tax reporting.
On the whole, Making Tax Digital is a good thing for businesses. For a start, digital accounting saves time. Reports can be created in a few minutes, which means more timely access to the information required to make critical business decisions.
With digital records there’ll be no more scrabbling for receipts and invoices, checking files and making sure spreadsheets are accurate and up to date.
Access to income tax estimates from HMRC will make cashflow forecasting much easier. Quarterly reporting of tax will also ensure tax bills don’t mount up.
Making Tax Digital in a nutshell
- All businesses will be required to maintain digital accounting records (there are some exceptions)
- Businesses will be required to use compatible accounting software to submit tax returns to HMRC
- Returns will move from annual to quarterly